GLG News by Gary Drimmer

Implications: It is a win-win marriage made in Brazil. The timing is perfect to take advantage of record stock prices and commodity prices, though wet corn milling might have some problems next year.

Analysis: The top management of these global companies are world class. One of the issues this merger will solve is the replacement for CPI's Sam Scott who earlier this year had announced his retirement (maybe to work in Washington for Obama?). The merger will probably wipe out the majority of CPI's corporate staff in Westchester (IL not NY), and could eventually result in a transfer of CPI's North American Division to St. Louis into the cramped BG NA space. Both companies have believed in strong regional and decentralized management so there will not be much of a cultural change. There will be considerable savings on corn origination and hedging as well as on the operations side where BG has been working diligently to reduce costs.

The timing is also perfect with both companies sporting high stock prices. BG is a young public company, with a triple digit history as a global company. It's one major purchase had to be financed, stretching it's credit at the time to the limit. This time around with a solid stock, strong outlook and good credit rating, BG will be able to grow it's business by over 20% with a stock swap.

Some major analyst today have given the deal a thumbs up today (BMO, Deutche Bank and Morgan Stanley) and even a new target for Bunge of $160. The stock is down for the first two days after the announcement as it appears the market is concerned about the mid-term outlook for the wet corn milling industry with the potential impact of record high net corn prices on contracting for next year, and the added financial stress on Bunge and its top management. At least S&P and Fitch have said they will keep their credit ratings unchanged for BG at BBB.

BG needed a fourth leg to its operations and their CEO Alberto Weiser was looking for a company in the sector that was in  value added processing. CPI was the only pure wet corn milling play and it also had a very strong US and Brazilian slant, just as BG does. BG should be able to provide the momentum on international expansion that CPI needed, in what otherwise were becoming mature markets. BG should also provide R&D leadership out of Brazil to accelerate new ingredients out of CPI. CPI will also provide BG with more balance to its processing which is heavily weighted to oilseed processing and trading right now.

It is a marriage possibly made in Brazil, given the strength of both company's Brazilian operations and top management ties to Brazil. It should prove fruitful in the long term, though the North American wet corn milling industry could be in for a difficult time next year if corn prices stay above $7 a bushel and it could be scary if the US corn crop gets hit with a hot dry spell during silking and pollination.

Implications: There are possibly 4-6 million acres lost this year due to flooding in the Midwest. This has been enough to force corn, soybean and some meat prices to record prices this month. If prices rise further due to a reduction in yields due to a hot dry spell during pollination, will the government be forced to take action to mitigate the impact on food inflation?

Analysis: We have had some heavy showers this weekend here in parts of Midwest this weekend. I normally would have said some good showers, but anything more then a light shower is not good right now. The estimates of losses in Iowa alone are over $3 billion and possibly 4 million acres. Add the flooding along the Mississippi in Missouri and Illinois and the fields flooded by heavy rains in Wisconsin, Indiana and Kansas, and the total might end up as high as 6 million acres. With the continued showers, it has made it impossible for farmers to return to their fields to finish seeding of the soybean crop or re-seed their flooded fields of corn and soybeans. If you add the possibility (some say probability) of a hot, dry spell this summer during pollination, and the stage is set for another jump in corn and soybean prices. We could see $10 corn and $20 soybeans.

Such a jump in prices would have a major impact on all the major grain nd grain processing companies, including Cargill, ADM, Bunge, Corn Products International and Tate & Lyle. It would also be negative to the major food and meat producers such as Kraft Foods, Conagra, Kelloggs, Smithfield, Unilever, Tyson and Pilgrims Pride. The ethanol companies would be hurt as well unless ethanol prices continue to climb. Only the major fertilizer companies (Mosaic and Potash) and seed companies (Monsanto, DuPont's Pioneer Seed Syngenta, Bayer Life Sciences, and BASF) will do well as demand will increase for next year. It is important to note that 6 million acres is less then the total intended acres for corn and soybeans this year, which means that majority of farmers will could still have a good crop with extraordinary prices.

The NYT article talks about two possibilities the government might consider to reduce a jump in food prices.  The first is to reduce the mandates on ethanol which is set at 9 billion gallons this year. It mentions a new study to released on 6/23 by Keith Collins and reportedly showing that ethanol is responsible for up to half the increase in corn over the past few years. The GMA and beef, poultry and pork organizations are all pushing for a cut in the ethanol mandate, which should be tied to a reduction in subsidies to assure a reduction in corn to ethanol use.

The other proposal mentioned is an opening of some of the land in the Conservation Reserve Program (CRP). With about 34 million acres in this program, this is the only way to bring down corn,  soybean and wheat prices by the end of 2009, except for perfect crop weather for the remainder of 2008 around the world. A large portion of the 34 million acres is not really productive farm land and will remain there no matter what. Subject to how bad the crops end up this year, a release of 10-15 million acres even for one year would be enough to bring prices back down to levels that would be acceptable to everyone and still allow for the ethanol mandate to be in place in 2010. It would also mean a banner year for almost all sectors by the end of 2009, most especially the seed and fertilizer companies around the world!

Implications: Flooding across the Midwest is causing billions of dollars of crop damage as corn and soybean crops are killed or washed away. What had looked as a stellar year for farmers throughout the Midwest will result in some major losers, starting with farmers and livestock producers, and continuing with crop insurance companies and the U.S government that back those policies.

Analysis: It is still too early to know how many acres of corn and soybeans with be lost this year, but the insurance claims will be in the billions. It appears that there could be as much as 2-3 million acres EACH of corn and soybean lost around the country. While we have been focused on the flooding in Iowa these past few days, there have been lost crops in Nebraska, Missouri, Illinois, Indiana and Wisconsin as well. Today there was a levy on the Mississippi river that was breached flooding several miles of farm land on the Illinois side of the river.

This article by Business Week uses an estimate based on the loss ration of 2.19 from the terrible 1993 flooding and based on  the estimated $8 billion of crop insurance for this year, the insurance losses could be over $16 billion. The flood in 1993 started much further north and west, so even with the water levels in some areas in Iowa being much higher, it is possible that the farm damage will not reach a comparable ratio. My quick estimate based on the high end of potential lost acres would be "only" $8-9 billion for crops. Of that, the government would cover 23% of the losses.

Who are the big players in the crop insurance business? Some of the biggest are Wells Fargo, Ace. Ltd. (Ran and Hail LLC), Westfield Insurance Company ( John Deere Risk Protection Inc.) and  Agricultural Insurance Company.

The farmers will not recover all their losses, and there will be some hard times in a year when most farmers expected to hit the jackpot. One of the saddest losses, will be farmers who sold or hedged part of their crop last year when corn was trading around $4/bushel. It hurts when you have to buy in your contract at a $3/bushel. It would have hurt to deliver the corn when the market had gone up so much, but it stings when you have to actually pay cash for that difference.

Implications: The Argentine farmer strike continue. It has been 100 days with on and off again strikes, with truckers and housewives joining the protests. Exports as well as domestic agricultural processing has been stopped again, putting additional pressure on soybeans in the US and the Argentine Government.

Analysis: For those who are counting, Argentine farmers have just declared their fourth strike in the past 3 months to protest the increase in export taxes on unprocessed agricultural products (soybeans, wheat , sunflower seed and corn). This follows the arrest of some protesters on June 15th and the end of the last strike last week. The President Cristina Fernandez de Kirchner continues to lose popularity and the bets are on as to when the economy will suffer its next major collapse.

Argentina is a leading exporter of grains, oilseeds, vegetable oils, soybean meal and beef. These strikes have disrupted all of these exports as well as the supply to the markets in Buenos Aires. Millions of gallons of milk have been dumped as they could not reach their markets. Housewives in Buenos Aires have been supporting the farmers banging their empty pots and pans.

All of the major international grain companies have investments in Argentina. Many are exporters and processors in Argentina, such as ADM, Cargill, Bunge and Louis Dreyfus Company, while others such as Corn Products International only process domestic grains. For the first quarter of this year these companies did not report any major financial losses from these strikes, but 2 12/ months have gone by with more strike days then not.

The continued disruption of exports will cost Argentina and its farmers in the future, as it is seen as a less dependable supplier and will be discounted in the word markets. In the meantime, US and Brazilian soybean exports will be stretched to the maximum until Argentina establishes some normality. 

Implications: The record rains and flooding in Iowa will result in a further drop in corn and soybean production this year, with estimates of up to  3 million acres and 20% of the Iowa crops lost. This has already caused a run up in corn, soybeans and wheat prices and a drop in many companies' stocks, including ADM, Corn Products International, Tyson, Smithfield and Verasun. There are a few winners, such as Monsanto, Mosaic and Potash, as they will sell more of their products at possibly a higher price over the next 12 months. These higher prices will have an impact on consumers around the world and will force additional inflation among the poorest countries.

Analysis: Sitting here in Chicago, we are surrounded by water (rivers and lakes), and are now surrounded by states that are flooding. Iowa is the worst hit by far. The saying is that rain makes grain, but not this year. The pictures of the cities are terrible though there are few pictures in the press of the tragic flooded fields of the mid-west. Some early estimates are that up to 3 million acres of corn and soybeans have been lost. This article talks of 9% of the corn crop and 14% of the soybean crop being lost in Iowa. That is a lot when you consider this is the state with the largest corn production and one of the top three soybean producers. If this was the middle of May it wouldn't be much of a problem, but given it is the middle of June, it will be too late to replant corn, and it is getting late even for soybeans.

There have been additional acres lost in Wisconsin, Illinois, Missouri and Indiana. There is still the probability that as the river flooding moves south, we will see more acres under water. Corn and soybean prices are going to continue their climb up to ratio a smaller harvest this fall and to induce additional planting in South America this fall. Animal feed producers can switch to feeding more soft wheat, which is why wheat prices have been pulled up by the jump in corn prices.

Small and medium size independent livestock and pork producers in Iowa and neighboring states are not going to survive this year. Even larger products will be hit around the country. Many companies' stocks, including ADM, Corn Products International, Tyson, Smithfield, Poet and Verasun have been hit. Food companies are going to be hit by higher costs and lower demand in this weak economy. The question is how much  rationing is needed and who will cut back. New ethanol plants that are just opening will be facing negative margins if they have to enter the market today to but corn. Many plants under construction are slowing the pace to see how the market evolves.

There are a few winners, such as Monsanto, Mosaic and Potash, as these companies sell inputs, and given the current scenario, there will continue to be strong demand and high prices for at least the next two years, and probably more likely three to four years. What is difficult to quantify is the impact on global inflation and the global economy. With over 1.8 billion people trying to survive on less then $2 a day, it is clear that this further food inflation will hit them hardest. Will this force international bodies to mandate a reduction in the use of foods for biofuels? Will countries be more open to the planting and eating of genetically modified crops? Will the U.S. and Europe lower barriers to the import of Brazilian's greener ethanol? Disasters can cause major changes not just in prices, but in legislation, so keep an eye not just on the skies but at the major capitals of the world, unless we have a perfect summer in the corn and soybean belt for the remainder of the year.

Implications: The midwest has had exceptional amounts of rain since last December leading to major delays in the seeding and emergence of the corn and soybean crops. La Niña has been blamed for the cool wet weather, if it is disappearing what type of summer and crop will we have.

Analysis: Anyone living in the midwest can tell you it has been a wet cool spring. We have also seen my tornadoes then we would want to, with tornadoes touching down yesterday (6/7) just south of my home in south loop of Chicago. The weekly planting reports have reflected an exceptionally late rate of seeding for both the corn and soybean crops. They do not reflect the amount of fields that have needed to be reseeded because of excessive rains killing young plants or preventing seeds from even germinating.

We will get a revised estimate for supply and demand from the USDA and a revised estimate on acreage at the end of the month, though it is not unheard of the USDA to make revision with the S&D report. Given the delays in seeding, it is clear that prices are going to need to ration the supply of corn and even US soybeans. US soybeans have had an unanticipated boost by the Argentine framer strike which has pushed some shipments this spring to the US.

The La Niña cold water phenomenon in the South Pacific appears to be ending and could, according to NOAA,  be entering a neutral phase by the end of the summer. The Niña has been blamed for the wet, cool spring in the midwest, as well as excess rains in Bolivia, a shortage of rain in norther Argentina, a potentially excessively hot summer this year in Shanghai, shark attacks off the west coast of Mexico and less typhoons in Hawaii. Depending on when it ends, if it does not return after a pause of a few months, or switch into the El Niño warm water temperature phenomenon , we could have a good summer growing season, or maybe not.

What we do need is continued rains through the critical months of July and August as well as warm and not 100F + stretches of weather. We do begin with the probability of it remaining moist through the end of June, given all the moisture in the surface soils. It is also probable that we will have hot dry spells.  If we loose more yield on top of lost acreage we will see lot's of corn price records and eventually new records for soybeans surpassing to the records that were established earlier this year, as the market will need to ratio a limited supply.

Historically one could think $7 corn and $14 soybeans would do it, this year it might take $10 corn and $20 soybeans. We recently saw $25 spring wheat, so anything is possible. Be sure to have lots of sun screen for the summer and hold on to your hats if there is no rain to blow them away, as the prices will! Of course we could have a perfect summer also know as a "greenhouse" climate for the crops this summer, in which case prices could ease, but I would not expect corn and soybean prices to tumble as wheat did from its highs this year.

Implications: World sugar prices have dropped below the 10 cent/lb. level , even as energy prices and food demand increases. Why is this happening, will it end soon and what are the implications for ethanol, HFCS and alternative crops next year?

Analysis: World sugar prices (not U.S. sugar prices) are off 30% from their March high of 15.21 cents/lb., having dropped below 10 cents/lb. for the first time since last October. This is all due to a large jump in supply without a corresponding increase in demand. Brazil, the world's largest sugar producer with 20% of global production and 35% of the world exports has increased production by 1.6 million metric tons, leading to a global excess in production of 11 million metric tons. This will facilitate a projected 15% increase in ethanol production in Brazil which will lead to an increase in ethanol exports to the U.S. later this year. Major agribusinesses like Bunge have already begun to invest in the Brazilian sugar/ethanol industry, while others like ADM continue to search for the right investment. Much of Brazil's ethanol is exported to the U.S. after being dehydrated in a Caribbean Basin Initiative (CBI) country to avoid the import duty still levied on imported ethanol.

India, the second largest sugar producer, in addition to ramping up ethanol production will be switching to other crops for their next crop, given the low price of sugar and high price of other food crops that can be grown on the same land. Clearly there will be a significant drop in sugar production for the 09/10 crop year.

Looking at the U.S. and North America, NY raw No. 14 sugar prices have dropped below the 21 cent/lb. forfeiture level. While consumption of sweeteners continues a slow decline with sugar and HFCS being replaced with artificial sweeteners, there has also been an issue with refining capacity after the February explosion at Imperial Sugar, which is causing other refineries to work overtime.

Anyone looking for more details on the U.S., Mexican, Americas and global S&D should read the USDA Sugar and Sweeteners Outlook that was released this week: http://usda.mannlib.cornell.edu/MannUsda/viewDocumentInfo.do?documentID=1386
One statistic of interest is the HFCS market in Mexico which will impact wet millers including ADM, Cargill, Tate & Lyle, and Corn Products International. The USDA projects HFCS sales in Mexico for the 07/08 and 08/09 years to remain at 800,000 metric tons a year dry basis due to relatively low sugar prices in Mexico. At the same time sugar exports from Mexico to the U.S. which is now completely open under NAFTA, will remain high. It would appear that ethanol production from sugar needs to increase throughout the world to pull the demand side on sugar.





 

Implications: With corn prices climbing to record new highs everyday, there is additional incentive to accelerate the drive to switch from corn to cellulose as the raw material for ethanol in the U.S. The Department of Energy, Congress and private enterprize have their foot on the accelerator to find a commercially viable cellulosic ethanol production technology.

Analysis: With corn prices climbing to record new highs nearly everyday, and a projected 33% of next year's U.S. corn crop going to produce ethanol, it is clear that this is not sustainable, even if marginally profitable with $125/barrel oil.

Over the past 18 months the U.S. government has committed over $1 billion to promote the production of cellulosic ethanol. Tied to this there appears to be a reduction in support to ethanol in the new Farm Bill, reducing the incentive to blend ethanol from 51 cents/gallon to 45 cents a gallon. This will not be enough to stop the construction of plants that are already past the financing stage, but tied to the run away corn prices and shift in political and consumer sentiment, it is forcing the cancelation of many proposed projects. ADM has the two largest plants that are still to be built, and they say they are still going ahead, with the financial resources in their CAPEX. I expect that corn to ethanol capacity in the current round of construction will peak below the 14 billion gallon/year capacity at the beginning of 2010. New commercial cellulosic ethanol plant construction will not begin on a large scale for at least another 3-4 years, as the process has to be proven and both capital and production costs have to be reduced  before financing can be obtained for these projects without government matching funds.

Keep an eye on Brazil's as they will be exporting larger quantities of  ethanol to the U.S., EU  and Japan this year. Though the Brazilian producers and exporters would like to see the import restrictions/tariffs removed around the world, they have growing incentives to export as domestic Brazilian gasoline prices remain low and a bumper sugar crop has dropped global sugar prices and  are allowing for low ethanol production costs in Brazil.

Implications: Argentine farmers are blocking highways and roads in their second strike of the year protesting increases on taxes. Major grain companies ADM, Bunge, Cargill, Corn Products and Dreyfus have major operations that are being impacted. Last month the strike caused major food shortages in Buenos Aires as well as a disruption in Argntine exports.

Analysis: Argentina is one of top global exporters of soybean oil, soybean meal, wheat and beef and the second largest exporter of corn and the third largest exporter of soybeans. The government earlier this year announced an increase in the taxes on a sliding scale based on world prices (with a peak of 40%). The government has also imposed export restrictions on beef and a temporary restriction on wheat exports in an attempt to control inflation. The farmers in March went on an indefinite strike, blocking all roads and not only cutting off exports, but also nearly causing Buenos Aires to run out of food.

At the beginning of April, with corn and soybeans still to be harvested and moved to market, the farmers and government agreed to a one month cooling off period to resolve the issues. The government was to open up beef exports and reduce the tax, at least on smaller farmers.

This strike is called for 8 days, and will not cut off food supplies to Buenos Aires. It is long enough to have an impact down the road on exports as well as supplies to domestic oilseed crushing plants and wheat flour mills. both of which supply the export market as well as the domestic market.  Eight days might not be long enough for the major companies to have to declare force majeure or divert their sales to Brazil or the US. The US has already seen some sales move north to avoid this potential second strike. Should this strike run on it will have an impact on the major players: Cargill, Bunge, ADM and Dreyfus. None of these companies said that the last strike had a material impact on their earnings.

An extended strike, beyond the 8 days, will also result in additional draw down of an already low soybean carryout in the US. This could add fire to the inverse in the soybean futures.

Keep your eyes on Argentina and let's see how this Tango plays out.

Implications: The rapid increase in rice, wheat and vegetable oil prices has resulted in protests around the world as the poor are unable to feed themselves. The U.S. government is finally realizing that current model of sending U.S. farm products on U.S. flag ship vessels is a waste of money and neither helps the U.S. farmer or the poor around the world. A new model needs to be developed and this article and President Bush's announcement are just the first steps in what is needed. Financing to increase the use of farm inputs in the only way to increase production and solve the food issue as well as reduce global poverty.  

Analysis:

It is about time that farmers in the third world are
given the attention they deserve as a main piece in
finding a solution to the current global food
shortage. The attached WSJ Front page article " Bush Pushes Shift
In U.S. Food Aid" highlights the need to increase
investments in the developing world's farmers and not
just to spend excessive amount of money shipping U.S.
farm products on U.S. flag ships to feed the poor. I
just returned for a three week volunteer consultancy
working with a group of 4000 small farmers in Uganda.
These poor farmers are wanting to move away from
subsistence farming to commercial farming. Their
biggest problem is financing to be able to purchase
agricultural inputs to increase production. Malawi is
an excellent example of what can be done. By providing
farmers with fertilizer and improved seed they were
able to double production in one year. My work in
Uganda showed that similar increases could be achieved
if the farmers could obtain reasonable financing for
the needed agricultural inputs. Jeffrey D. Sachs, the
Director of The Earth Institute, Quetelet Professor of
Sustainable Development recently estimated it would
only take $10 billion to replicate the Malawi model
and solve the food hunger problem. If this was done in
the form of revolving loans, these poor farmers around
the world would gladly move away from depending on
handouts and celebrate their entry into the commercial
farming community. That would be real progress!

The answer will not come from organic farming either. 
While Africa can ship organic coffee and fruits to the 
U.S. and Europe for a nice profit, it cannot produce enough
grains and oilseeds to feed itself with organic farming. Dr.
Norman Bourlag, the Nobel Peace Prize Laureate for his role
as the Father of the Green Revolution continue to work on
solving Africa's food problem and he starts from attacking 
organic farming in Africa.

Fertilizer companies, basic farm tools and seed companies 
will all benefit in my model, but most importantly the 
world's poor will benefit, and that will help the overall 
world economy.

Implications: Ug99 a wheat rust first found in Uganda in 1999 has been on the move. It first began spreading to neighboring countries in 2001, It is now as far away as the Middle East, with the likelihood that it will move east into some major wheat growing regions of Asia. With global wheat supplies already at 40+ year lows, are we about to see riots when there is no bread in some of the poorest countries of the world?

Analysis: Rust is a nasty fungus. Just ask Brazilian farmers who have been spending a fortune in fungicides to combat Asian Soybean Rust. Now there is a wheat rust that is spreading from Africa towards Asia. This rust could effect a region of the world that produces 117 million tons of wheat.

Ug99 as the rust is known was first identified in Uganda in 1999, which is where the name comes from. In 2001 it had begun to have a major impact on the Kenya's wheat crop. The fungus is carried easily in the air and will continue to affect crops in a region year after fear if the winter temperatures are not low enough to kill it. This probably means that the US, Australia, Argentina and Europe will not be effected, but other major wheat producing countries will, and possibly soon.

The fungus has already migrated as far as Iran. From there it is enroute  to Afghanistan, India, Pakistan, Turkmenistan, Uzbekistan and Kazakhastan.

Doctor Norma Bourlag, the Nobel Peace Prize Laureate for his work on the green revolution, began raising the alarm on this potential disaster in 2005. There needs to be an immediate and large research effort to find wheat varieties that are resistent to Ug99. The cost of using fungicides could be too high for many small farmers in this poor region of the world.
Wheat is not of interest to the major seed companies, so the research needs to be promoted by Universities, governments and NGO very quickly.

You now have been warned of a new threat to global food supplies.

Implications: The La Nina phenomenon, which could prolong the drought in the SW and SE of the US should be peaking this month, but there is the risk, that it could persist into the spring, or even for years. NASA's satellites, using microwave scanners show that the current La Nina continued to gain strength in November and December, which probably is the cause for the dry conditions in northern Argentina and the dry conditions at the beginning of Brazil's soybean seeding last year.

Analysis: La Nina, marked by strong easterly trade winds and lower then normal surface water temperatures in the eastern tropical Pacific Ocean normally tends to follow the warm surface El Nino current years. The photos from NASA's Earth Observatory in the EO Newsroom article show the La Nina from space using special microwave scanners on one of NASA's satellites. La Nina continued to gain strength from October 2007 until this month. Normally the La Nina phenomenon, which appeared in February 2007, should peak this month, which it appears to be doing. Of course these phenomenons are not completely predictable and are also being influenced by global warming in ways that make predictions that much harder.

Why is this important to us. Just look at grain prices. La Nina tends to result in dry regions in Argentina and Brazil. We have seen this in southern Brazil and northern Argentina beginning at the end of last year. This caused a delay in soybean seeding in Brazil and problems with the wheat crop at the end of last year in Argentina (late frost) and the development of this year's corn crop due to very dry conditions.

We need to be aware that even if the La Nina peaks this month, it will probably result in colder then normal weather in the US Great Plains that could effect the winter wheat crop. It is also expected to prolong the droughts in the SE and SW of the US. The US needs to have a near perfect crop to prevent even higher global agricultural prices and agflation. This is due to multi-year low world carryout inventories of wheat, corn and soybeans leading into this year's harvests combined with continued strong demand. Already the US and the EU did not plant the additional winter wheat that was expected. Any major drought in the major US corn or soybean growing regions would have consequences that would probably result in global government intervention. Already countries around the world including Argentina, China, Russia, India and Indonesia have intervened in the grain and vegetable oil markets to try to control inflation. Keep your eyes on the weather, even if it is all the way out in the tropical Pacific Ocean.

Implications: GM announces a commitment for cellulosic ethanol shortly after Daimler along with ADM and Bayer CropSciences announced last week an alliance to develop jatropha. This comes at a time when the EU and the US has begun to again question the use food crops for fuel, as well as the environmental net benefit of corn, or the use of palm or soybeans produced where there used to be rain forests. Will all this support result in an economical breakthrough in the commercial production of cellulosic ethanol and if so, when?

Analysis: GM is adding its support to the development of an economical cellulosic ethanol by buying a stake in Coskata Ltd. a startup cellulosic ethanol company that aims to be in commercial production of cellulosic ethanol by 2011. They believe they can produce cellulosic ethanol for $1.00/ gallon using one fourth the amount of water used to produce ethanol from corn. Lab tests show that their process produces 7.7 times the amount of energy used to produce it, compared to around 1.3 for ethanol from corn.

Coskata has a patented microorganism that is key to breaking down the strong lignin that holds cellulose together. The overall process they use is gasification which is a technology that has been around for over 70 years and helped fuel the German tanks in WWII.

The US will have a capacity to produce 13 billion gallons of ethanol from corn in 2009 if plants that are under construction are completed. That is close to the total target of corn to ethanol of 15 billion gallons for 2022 in the 2007 energy bill that was signed last month. The bill also calls for 16 billion gallons of cellulosic ethanol, but if it could be produced for $1 a gallon and if there was enough affordable raw material, one would expect cellulosic ethanol to eventually replace a considerable amount of ethanol produced from ethanol, especially with production cost being pushed above $2 a gallon by $5 a bushel corn.

Just last week, Daimler, Archer Daniels Midland and Bayer CropSciences announced a joint venture to develop jatropha, a bush that produces a seed that contains 30% oil, as a source of a sustainable and ecologically friendly biodiesel.

The EU is beginning to have second thoughts on the way they have rushed towards biofuels. They will shortly announce changes in their support for biofuels that are grown from the deforestation of rain forests in SE Asia to produce palm or the Amazon jungle in Brazil to produce soybeans. With soybeans reaching record high prices and corn not too far from a new record, the next move will be to reduce the use of food crops for biofuels, or at least reduce subsidies or mandates for their use. This will be accelerated with any major crop failure this year in the northern hemisphere growing season.

We are several years from having a commercially viable cellulosic plant up and running. The first test plants and the beginning of commercial plants are being built right now. The good thing is that there can be several processes using different raw materials that may prove viable. Given the urgent need to find clean, green alternatives that will reduce CO2 emissions, governments and major corporations should put all their weight behind these projects and reduce subsidies for less friendly biofuels.

 

Implications: Jatropha is gaining momentum with three major players announcing an an alliance which should improve the economics of Jatropha production on a global basis. Jatropha has the potential of being grown on 30 million hectares (over 70 million acres).

Analysis: Jatropha is a bush that originated in Central America. With its seed containing 30% oil that can be used for biodiesel, it has many positive traits that other oilseeds lack. It can be grown on marginal lands, is drought tolerant, requires very little fertilizer or other inputs. It does not require using land that currently is used for food production, and can provide additional income to farmers in the developing countries.

The entry of such big players as ADM, Bayer CropSciences and Daimler, following the recent announcement by D1 Oils and BP, shows that the crop has great potential. There are already significant efforts under way in India and China to produce commercial quantities of the crop.

It will take many years for the bush to be converted into a major source of oil, but this could eventually become a viable alternative source for a true renewable source of a biofuel that is sustainable and that does not compete with food crops. That should provide additional incentives for not only large companies, but for international government agencies and NGO to promote the rapid increase of acreage and production. Still we are talking of 5-10 years before we would see enough production to have an impact on other oilseed oils currently being used for biodiesel.

Implications: Monsanto's 1st quarter results jumped a surprising 188% beating most analyst projections. In their conference call they also reported on the results of their 2007 field work and research work. It continues to surpass what could have been anticipated even three years ago, as technology continues to allow Monsanto to use technology that is speeding up and improving improvements that is putting them in the drivers seat among seed and plant biotechnology companies. While the competition might not be happy, they are having trouble staying in the race. The only bumps in the road, are government regulators in the US and around the world. It could still prove to be a big bump to Monsanto obtaining their 2012 and 2020 targets. In the mean time they are speeding ahead.

Analysis: Monsanto's results for the first quarter of FY 2008 were enough to boost the stock price by 8% and into record territory. You can read more on their results through this link where you will see that most of the improvement comes from herbicide and seed sales in South America:
http://money.cnn.com/news/newsfeeds/articles/newstex/IBD-0001-22025377.htm

More important to Monsanto's longterm growth are the results they reported from field trials and their research for 2007. Robb Fraley could hardly be more enthusiastic or satisfied with the results of their field work in 2007 that he reported on the 1/3/08 conference call. They have 4 projects that advanced from phase 2 to 3,  which puts them on the road towards registration and commercialization in the next 3 to 4 years.

They made significant progress on drought tolerant crops, corn that will require less nitrogen, soybeans that produce oil that could be as healthy as olive oil and new insect and herbicide resistant soybeans. With soybeans and corn traits being stacked, this represents more value to the farmer as well as to Monsanto. Triple stacked corn and soybeans will be followed by the stacking of up to 8 new genes in SmartStax corn to be introduced in the midterm.

The one obstacle to their introduction of new traits that is completely out of their control is government regulation. Last year after receiving approval for their first genetically engineered corn to be released in Brazil, a judge imposed an injunction which is delaying potential sales. As they move to new traits and the stacking of new traits, Brazil, Argentina and the EU might delay the launching of these products. Though Monsanto has become a much more friendly and corporate responsible company, their detailed and meticulous effort to introduce new soybean traits could be delayed beyond Monsanto's schedule.

Monsanto suffered for many years due to the moratorium on new approvals in the EU. Even though the US won its WTO case against the EU after the Eu lifted their moratorium, Germany, France and Italy continue to question the approval process, at the same time that the feed industry is fighting for a more lax policy on non-intentional contamination of non-approved GMOs. Brazil frustrated Monsanto for many years by not giving them protection for their Roundup Ready IP. Argentina still doesn't.
The regulatory bump in the road is one that Monsanto is well aware of and better prepared for then any other seed company, but still it is one that they have to face and can not control. As long as it remains just a bump Monsanto should meet their product launch targets. If the bump turns into a wall, it might take them time to bring the wall down.

Implications: Many ethanol and biofuel stocks, along with the overall alternative energy sector took a nice bounce after the Senate passed its energy bill. Farm bill also has finally been passed and both will need working before being sent to the President, who might just not sign them. Corn ethanol stocks have been hurting this year as corn prices were rising and ethanol prices were dropping as the outlook for inventories and production of the two were going in opposite  directions.  With a 15 billion gallon a year mandate for corn to ethanol use by 2022, it does not appear that corn to ethanol has room to expand much beyond plants that are in production and under construction. Cellulosic ethanol has additional monetary incentives under both bills as well as a 21 billion a year mandate for use by 2022 (including other alternative liquid fuels such as biodiesel). These fuels have a longer road to becoming economical.

Analysis: With growing US and global pressure to find clean alternative sustainable fuels to replace petroleum, there are growing incentives to encourage and foment alternative fuels in the US. With national elections in the US occurring in the next 12 months, there is additional pressure to find a domestic solution to replacing imported fuels, and it would be very helpful if that supported our farm economy at the same time. Both parties as well as all presidential candidates are putting alternative fuels high up on their to do lists, which might pressure the President to sign and not veto the Farm and Energy Bills that come out of the Congressional  Conference Committees.

As the Senate has finalized their energy and farm bills, both containing substantial support for alternative energy and biofuels, the stocks in this sector had a significant bounce this past Friday. For the large corn to ethanol stocks, this was much needed after the beating they have had this year. This article mentions the near 11% jump of Aventine Renewable Energy Holdings and 4.3% increase in Verasun Energy Corp. stocks. Pacific Ethanol also had a great day and Archer Daniels Midland's (ADM), stock though not mentioned in the article, was up over 2%, while other grain and oilseed processors stumbled (Bunge was down over 1%).

The energy and farm bills, while fascinated with biofuels did little to help the cause of solar energy. Solar energy is one of the greenest of all energies, and a major part of the EU's push for alternative energy. Germany leads the pack, showing that incentives and technology can help develop new industries in the places you would least expect them.

Corn to ethanol still faces many short and long term issues. Though the mandate calls for 15 billion gallons a year of ethanol from corn, production doesn't seem to be as much of a problem as does profitability. With existing capacity and new capacity currently under construction, the US should reach an amazing 13.5 billion gallons a year of ethanol capacity by the end of next year. Virtually all of that is from corn.

There is still not a single commercial cellulosic ethanol plant in operation. The plants that are currently under construction or on the drawing boards are still being built to test technologies and to improve production costs. While there are many promising technologies and new potential breakthrough technologies being announced nearly weekly, it is still not feasible to economically produce ethanol from cellulose, even with government subsidies. The first commercial plant will probably not be in production until 2010, and it still might not be able to operate at a profit.

At the same time Brazil can produce and ship a very green ethanol produced from sugar to the US at a profit, as soon as protectionist duties are removed. The same applies for potential ethanol exports from Brazil to the EU. The UN and other organizations are calling for duties on ethanol to be eliminated to help grow global trade and production.

There are many challenges out there for alternative fuels and the US ethanol industry has been given additional toils in the Senate bills. They will probably make it through committee and will even likely be signed into law by President Bush, after he complains a few more times about the lost opportunity to reduce farm subsidies.

Implications: There has been a paradyne shift in commodity prices. It is hard to think of a return to $20 a barrel oil. In the same way grain and oilseed prices are now at a new level as demand has grown and will outstrip supplies for the next few years. Higher prices and possibly new record prices are likely in 2008. Biofuels and growth in food demand have driven down inventories and weather around the world (with the exception of North America so far) has also contributed to reduced supplies. The latest USDA ending inventory estimates for the current crop year show how tight things are in the US and the rest of the world. Wheat inventories in the US will be the lowest in the past 60 years. Now that is scary.

Analysis: The Economist cover page this week shows a piece of bread with the title toasted on it: The End of Cheap Food. It is a great article and worth reading, as is the linked article by Darrell Good, a wonderful ag economist at the University of Illinois.

Prices of grains and oilseeds have been climbing for the past year and a half, as demand has continued to outstrip supply. This, tied to some production problems in China, Australia, Europe and now potentially India, Pakistan, Argentina and even Brazil has the potential of pushing US prices to record highs in an effort to increase production and ration supplies.

Demand has been coming biofuels and an improving diet in China and India. This has resulted in strong exports this year from the US, helped also by the weak dollar. The USDA's 2007-2008 U.S. ending stocks were released today and they show a reduction from the previous estimate as follows: Corn 1.897 to 1.797 billion bushels; Soybeans 210 to 185 million bushels; Wheat 312 to 280 million bushels, which is the lowest wheat inventory in 60 years (before when I was born). On a global basis ending stocks were reduced for all major crops except for a marginal increase in wheat. The numbers are as follows: Corn from 110.4 to 109.1 million tons; Soybeans 49.4 to 47.3 million tons; Wheat was increased from 109.8 to 110.1 million tons. Increased exports are good for the major grain companies (Cargill, ADM, Bunge and LDC), while high prices could hurt the same companies US processing divisions as well as major food  (Kellogg, Nestle and ConAgra among others), as well as the large livestock and poultry companies (Tyson, Smithfield and Pilgrims Pride).

Argentina did receive some rain in the corn belt on Monday, but along with Southern Brazil is now looking at a week of hot drier weather. The soybean and corn crops in both countries are now completely seeded, and will need timely rains to produce good crops.

As farmers in North America begin to look at the next years there will be strong incentives to maximize production. That means the top of the line seeds (Monsanto, Pioneer, Syngenta and Bayer among others), maximizing fertilizer inputs (Mosaic and PotashCorp) and other ag chemicals such as herbicides and pesticides (DuPont, Syngenta, Bayer and Monsanto again).

This year is going down as a great one for the North American framer. Next one could be a record one if weather in the US doesn't turn too dry, or too wet, or too cold and as long as many other chips fall in the right way. No matter what, we are no more likely to see a return of $2.00 a bushel corn then we are to see $20 a barrel crude oil.

Implications: There has been a paradyn shift in commodity prices. It is hard to think of a return to $20 a barrel oil. In the same way grain and oilseed prices are now at a new level as demand has grown and will outstrip supplies for the next few years. Higher prices and possibly new record prices are likely in 2008. Biofuels and growth in food demand have driven down inventories and weather around the world (with the exception of North America so far) has also contributed to reduced supplies. The latest USDA eneding inventory estimates for the current crop year show how tight things are in the US and the rest of the world. Wheat inventories in the US will be the lowest in the past 60 years. Now that is scary.

Analysis: The USDA's 2007-2008 U.S. ending stocks estimate for:
Corn was reduced from 1.897 to 1.797 billion bushels.
Soybeans was reduced from 210 to 185 million bushels.
Wheat was reduced from 312 to 280 million bushels (the lowest in 60 years).
Sugar was increased from 1.880 to 2.050 million tons.
Cotton was increased from 7.60 to 7.70 million bales.

The USDA's 2007-2008 world ending stocks estimate for:
Corn was reduced from 110.4 to 109.1 million tons.
Soybeans was reduced from 49.4 to 47.3 million tons.
Wheat was increased from 109.8 to 110.1 million tons.
Cotton was increased from 54.8 to 55.3 million bales.

Implications: Argentina is becoming dry, and Brazil could follow. This is pushing soybean up towards record high prices, with corn returning to five month highs. Spring wheat, which is yet to be planted in North America is reaching for the sky as Argentina imposes export controls and Canada confirms a smaller harvest. Major processors and exporters such as Cargill, ADM, Bunge, LDC and Corn Products International might see a drop in their South American profits next year.

Analysis: Crude oil prices dropped below $90 a barrel, just as agricultural commodity prices are beginning to take off. While soybean oil prices have been following crude oil prices up, up and away for the past six months, we now have soybean meal taking the lead for the soy complex. This push comes as Brazilian farmers complete their seeding after a dry spring. Now dry weather in Argentina is beginning to appear as a potential concern for soybean yields in Argentina, as well a potential dry summer in Brazil. With world and US soybean stocks dropping, anything but a bumper crop in South America could push "beans to the teens". Soybeans reached as high as $12.90 a bushel on June 5th, 1973, but never reached the teens. Given inflation, it would seem that a $13 soybean would not be hard to achieve.

Argentina and Brazil are both large corn producers as well, with Argentina playing a larger role in the global export market. Brazil keeps the large majority of its crop to feed its livestock (Brazil is now the largest chicken and pork exporter and becoming an ever larger beef exporter).

While the dry weather in Argentina shouldn't have a major impact on this year's crop which has begun to be harvested, any reduction in a very tight market can push prices higher. There is concern that a frost earlier this year did hurt yields and this dry weather won't help. Dry weather at harvest will help improve quality and speed the harvest, at the cost of the extra yield. Argentina closed their wheat export registry for 15 days last week over concerns over the overall wheat harvest size. Last week Canada also pushed up wheat prices by announcing a further reduction in their estimate for this year's crop to 20.1 million tons. The USDA is estimating the global carryover for wheat will be at its level since 1978.

So what does this mean for US grain and future prices? It means that the markets will need to restrict demand with higher prices while encouraging supply. For corn and soybeans this could mean racketing up prices as they compete for acres next Spring. As for wheat, the price of winter wheat in Kansas City and Chicago can only restrict demand, while the price of spring wheat in Minneapolis can jump to encourage farmers to plant more wheat and less corn and soybeans in the Northern Plain and Canada.

All of the major agriculture processors, including Cargill, Bunge ADM, LDA, and Corn Products have major operations in South America that benefit from large production. The first four of these companies would see their processing as well as export businesses negatively impacted by a drop in crop production,as they depend on low harvest prices and large volumes to generate profits.

All eyes should be focused on Argentina and Brazil for the next four months, without taking your eye off of the drought in the SE and SW of the US. We are in a La Nina year, and there is always the potential for a wider drought in North America next year.

Implications: What might be the largest single project for jatropha production has just been announced by Bionor in the Philippines. With soy oil prices reaching record high prices and the cry against food to fuel and for sustainable farming, is this the agriculture project of the future? How soon will we see that future?

Analysis: Bionor Transformation S.A. has just announced a $200 million to develop at least 247,000 acres of land to jatropha production in the Philippines. Bionor is a large biodiesel producer in the crowded EU market, with 125,000 tonnes of production between Spain and Italy with an additional 900,000 tonnes coming on line in Spain and Brazil next year.

This announcement of a $200 million investment in jatropha production is the largest in the Philippines and possibly the largest single project announced in the world. China and India have been moving forward with jatropha production with aim of taking advantage of marginal land and abundant labor to produce an environmentally friendly and renewable fuel. African countries, with support from the EU and Asia have also begun work on jatropha production.

Still, the economics of jatropha, as is the case with many biofuels is weak or unproven. Jatropha yields are not consistent and it will take a few more years of field work to increase the yields and make those yields more consistent. Nevertheless, jatropha is still one of the highest oil producing seeds in the world, with potential yields that are only second to Palm Oil on a per acre basis.

Jatropha has the very big advantage in the developing world that it can be grown on marginal lands that do not take acreage away from much needed food production. As the seeds currently do not ripen uniformly. This requires a large amount of manual labor, something that is readily available in the impoverished countryside of the developing world. Jatropha could become over time, one of the most  beneficial crops to replace petroleum, while not replacing food crops and contributing to the economies of the poorest countries in the world, a win-win-win crop.