GLG News by Joe Victor

Implications: Facts provide insight into how much corn must be produced in the long run. Knowing the facts provides a better understanding of how many acres, fertilizer demand and seed technology is required.

Analysis:  On 11/17/08 news wires reported the EPA has boosted renewable fuel production from 2008 to 2009 by 10.21% to a level of 11.1 billion gallons. One international wire service actually has stated the EPA raised "ethanol" use for 2009 to a level of 11.1 billion gallons!
      The facts are since 12/19/07 the Energy Independence and Security Act of 2007, clearly pointed out the renewable fuels target out to 2022, with the breakdown by fuel type of just how much of each fuel type such as ethanol (both corn based and non corn base) cellulosic, and biodiesel to be manufactured.
      For example, of the 2008 renewable fuel target of 9 billion gallons, ethanol's share was to be 9 billion gallons. For the 2009 renewable target of 11.1 billion gallons, ethanol made from corn is expected to be 10.5 billion gallons or 95% of the total. In 2010 the renewable fuel target is set at 13 billion gallons with ethanol made from corn to have 92% of the total share. This would require 30.7 million acres to planted, 28 million acres harvested with a yield of 161.5 bu/per acre and a conversion rate of 2.78 gallons of ethanol from one bu of corn.
      It is in 2014 when corn acres planted peak at 32.5 million, 29.6 million harvested, yield of 178.3 bu per acre and conversion of 2.83 gallons of ethanol from one bu of corn, to meet a renewable fuels target of 18.2 billion gallons of which corn based ethanol has market share of 79% or 14.4 billion gallons.
      It is in 2015 when the corn based ethanol reaches a peak of 15 billion gallons of the total renewable fuel target of 20.5 billion gallons is set. The market share for corn base ethanol remains at 15 billion gallons into 2022 when the total renewable target of 36 billion gallons is set.
            Allendale Inc continues to monitor the projected demand placed on corn based ethanol as well as cellulosic ethanol, imports, liquids from biomass, and biodiesel as it places greater demand on the agriculture sector and plays a key role in the pricing structure of grain and oilseeds.

Implications: Despite increasing world grain and oilseed production, demand continues to strain inventory for corn and world vegoils.

Analysis:  Corn Domestic Stocks and Stocks to Use: 2007/08 presently estimated at 1.576 bil bu vs August's 1.576 billion bushels vs 2006's 1.304 billion. For 2008/09 end stocks are projected at 1.018 billion bushels vs August's USDA estimate of 1.133 billion bu. 2007/08 Stocks to use for September estimate is 12.3% vs 12.3% last month vs 2006's 11.6% and 2005's 17.5%. USDA's 2008/09 estimate for end stocks to use is 8.1% (second tightest dating back to 1980) vs August's estimated 8.9% with 1995 the lowest at 5% dating back to 1980.
    World Stocks and Stocks to Use: 2007/08 world stocks of 123 million tonnes vs last months 122 million tonnes vs the previous years 109 million tonnes. USDA 2008/09 September end stocks are estimated at 110 million tonnes vs its August estimate of 112 million tonnes. 110 million tonnes of world end stocks would represent the fifth tightest dating back to 1980. Record high world stocks was 1986's 205 million tonnes. Record low end stocks for the world was 1983's 89 MMT. 2007/08 End stocks to use at 14.2% vs 14.0% last month and compares to USDA's 2008/09 September estimate of 12.5% vs August's estimate of 12.6%. At 12.5% end stocks to use, it represents the lowest on record dating back to 1980 with the second tightest in 2006 of 13.2%.   
    Season Average Farm Price: USDA estimates the Sept 2008/09 Season Average Farm price at $5.50/bushel vs its August estimate of $5.40 bushel. The SAFP for 2007/08 is $4.20 and 2006/07 was $3.04/bu.
    Days Supply: after total world demand is stripped from the total world supply, the number of days supply of world corn for 2008/09 is projected (since 1999/2000) at a record low 50 vs 58 in 2007/08. The previous record low dating back to 1999/2000 was 54 days in 2006/07 and well off the previous record high of 104 days in 1999/2000.    

Wheat Domestic Stocks and Stocks to Use: 2008/09 end stocks are projected at 574 mil bu via the September WASDE vs 574 million bushels estimates in the August WASDE. 2008/09 end stocks to use projections are 25% for the Sept WASDE report vs the same for the August WASDE and up 87% year on year.   
    World Stocks and Stocks to Use: 2008/09 world end stocks are projected at 139 million tonnes vs the August WASDE estimate of 136 million tonnes, up 21 MMT yr on yr. This compares to the 1995/96 year on year increase of 8 MMT regarded as a notable increase. 2008/09 world end stocks to use for September is estimated at 18% vs 17.7% estimated in the month of August vs 16.2% for the 2007/08 marketing year. At 18% end stocks to use, it represents the third tightest level dating back to 1980.   
    Season Average Farm Price: The SAFP for 2008/09 at $7.25 per bushel for the September estimate vs August's estimate of $7.25 per bushel.   
    Days Supply: after total world demand is stripped from the total world supply, the number of days supply of world wheat for 2008/09 is projected at 78 vs 69 in 2007/08. The record low dating back to 1999/2000 was 69 days in 2006/07 and well off the previous record high of 131 days in 1999/2000.  

Soybean Domestic Stocks and Stocks to Use: 2007/08 presently estimated at 135 million bushels vs 135 million bushels last month vs 574 million the previous year. 2008/09 end stocks are estimated at 135 million bushels vs the August estimate of 135 million bushels. The 135 million bushels are the third least amount since 112 million in 2003 and 1996's 132 million. 2007/08 Stocks to use as of the Sept WASDE are 4.6% vs August estimate of 4.4%. The Sept 4.6% estimate for 2007/08 is the second lowest dating back to 1980, with 2003's 4.4%. 2008/09 end stocks to use for August are projected at 4.6% tied with 2007/08 vs August estimate of 4.5%.   
    World Stocks and Stocks to Use: 2007/08 world stocks of 50 million tonnes vs last months 49 million tonnes vs last years 63 million tonnes. 50 million tonnes compare to a five year ave of 48.2 million tonnes. End stocks to use at 16.3% vs 16% last month. The five year ave has been 17.96%. 2006 end stocks to use for world soybeans was 21.2%. USDA's world 2008/09 end stocks for soybeans for the month of September is estimated at 51 million tonnes vs 49 million tonnes the previous month. 2008/09 end stocks to use are estimated at 16.3% vs August's 15.7%.   
    Season Average Farm Price: USDA's projected 2008/09 SAFP for September is projected at $12.35 per bushel vs its August estimate of $12.50 per bushel.   
    Days Supply: after total world demand of all vegetable oils is stripped from the total world supply, the number of days supply of world vegoils for 2008/09 is projected at 26 vs 25 in 2007/08. The record low dating back to 1999/2000 was 25 days in 2006/07 and off the previous record high of 35 days in 1999/2000.

Implications: Less than normal quarterly use of wheat builds US ending stocks however record quarterly use of US soybean and corn is expected to continue to keep at the knifes edge.

Analysis:     Corn Quarterly Stocks: USDA estimates June 1 Corn stocks on and off farm at 4.028 billion bushels vs 3.533 billion a year earlier. However such stocks levels implies 3rd quarter record usage of 2.831 billion bu. USDA official March 31st release was 3.419 billion bu use. The three year average third quarter use has been 2.532 billion bushels and five year average use of 2.409 billion bushels. One year ago usage for the third quarter was 2.535 billion bushels.   
    Corn Fundamentals: USDA's acreage and quarterly stocks suggest a fall in end stocks from 1.433 billion bushels for the 2007/08 market year to Allendale's estimate of 568 million bushels for the 2008/09 market year.   
    Soybean Quarterly Stocks: USDA estimates June 1 Soybean stocks on and off farm at 676 million bushels vs 1.092 billion a year earlier. Allendale third quarter soybean stocks estimate implies record usage of 758 million bushels. USDA official March 31st release was 904 million bu use. The three year average third quarter use has been 685 million bushels and five year average use of 630 million bushels. One year ago usage for the third quarter was 695 million bushels.
    Soybean Fundamentals: even though USDA's present acreage may suggest end stocks of 106 million bushels, Allendale estimates 2008/09 end stocks of 66 million bushels under average summer growing conditions. Present soybean crop conditions are 5% less than the five year average. The two most sensitive topics for future direction of futures is likely to be confined to weather forecast and the ongoing Argentina strike. Record third quarter use for US soybeans only emphasizes how beneficial the Argentina strike has been for world demand for US old crop soybeans.
    Wheat Quarterly Stocks: USDA estimates June 1 Wheat stocks on and off farm at 306 million bushels vs 456 million a year earlier. Allendale's fourth quarter wheat stocks est is implying usage of 404 million bushels, USDA's, March 31st implied third quarter use of 422 million bushels. The 404 million bushels of fourth quarter use compares to a five year average usage is 427 million bushels and three year average of 415 million bushels. One year earlier usage was 401 million bushels.   
    Wheat Fundamentals: USDA threw the wheat futures a curve in its acreage and stocks data on Monday, June 30th. Although USDA did reduce planted acres for all wheat vs its June 11th estimate it did increase harvested acres and less than expected fourth quarter use. Less quarterly use implies beginning stocks of 306 million bushels vs its June 11th estimate of 254 million. Projected 2008/09 end stocks are now estimated at 552 million bushels vs its June 11th estimate of 487 million bushels. This adjusted end stocks level of 552million bushels would be the highest since 2005's 571 million bushels.

Implications: China confident of its grain supply but not within the US according to Allendale Inc's research. The likelihood of China importing corn from the US is growing weaker.

Analysis:  USDA has released its first official 2008/09 World Agriculture Supply and Demand Outlook, the report confirmed our Allendale Inc estimates from our January 19th annual outlook conference with regards to the days supplies of wheat, corn and rice.
            The world days supplies of wheat and rice are projected to increase with corn now on a four year slide. The days of these world starches find an increase from 2007/08 to 2008/09 of 64 to 70 for wheat, 67 to 71 for rice and decrease in corn from 51 to 46. The 46 day supply is the smallest, dating back to 1999/2000 which then registered 104 days.
             Alarming is the days supply of US corn is extremely thin at only 22. Dating back to 1999/2000 US corn supplies have never been less than a month. 2003-04 recorded 34 days and was the tightest before Friday’s (05-09-2008) USDA projections were unveiled. 2007/08 days supply of corn is 39 suggesting the number of days of supply may experience a reduction of 17 which is slightly less than the 18 day drop from 2001-02 to 2002-03.
        With regards to the number of days supply of US rice, 2008/09 is estimated at 28 days, the lowest on record dating back to 1999/2000, with its peak of 67 days in 2005/06. Allendale’s research estimates for the 2008/09 marketing year, China holds 33% of the world wheat stocks, 28% of the world corn stocks, 48% of the world rice stocks but only 5.7% of the world soybean stocks.

Implications: USDA may have no choice but to trim its 2008 corn yield because of delayed spring plantings. Less yield per acre and fewer acres could have key implications to supply/demand and ultimately price.

Analysis: Corn Special: Next Friday 05/09/08, USDA will unveil its first 2008/09 supply and demand projections in the May WASDE. The question we ask, could USDA adjust acres planted/harvested and or yield for corn given the less than stellar planting pace? Allendale’s research compared the May estimates vs USDA March Prospective Planting estimates with regards to acreage adjust and concludes, do not anticipate a notable acreage adjustment. However what USDA has done is adjust yield based on planting performance for the May WASDE vs its Outlook Forum estimates (typically held in late Feb/Early March.
                 Dating back to 1998, there have been 6 of 10 years when USDA has made a 1 bu/acre or larger adjustment to yield from the Forum to the May WASDE. The minimum adjustment higher has been 1.1 bu per acre in 2001 and maximum adjustment higher of 2.8 bu per acre in 2004. Since 1998 there has been one time when USDA lowered the corn yield from Forum to May WASDE and its was a very notable 2.5 bu/acre reduction, in 2007. Of the six years only one was reduced, but of equal interest is of the most recent four May WASDE reports, each year, USDA has made reference to adjusting yield based on the pace of planting. 
    Allendale suggest, USDA is likely to continue its adjusting ways next Friday. In the 2008 Feb Outlook Forum USDA estimated yield at 154.9 bu per acre. Most likely yield could be adjusted lower by more than last years 2.5 bpa in 2007 when the planting pace was running 13% behind as of May 4th. 
    Allendale estimates the May 4th, 2008 planting pace to be a minimum of 25% behind the five year ave. The question, would USDA be as so bold to reduce yield per acre by an epic 5 bu? Allendale would be shocked if USDA were to make such a bold move. Allendale's research suggest the trade could have a bullish reaction to a reduce yield in May 9th's WASDE report but foresees USDA not only adjusting overall 2008/09 corn production lower, but most likely adjusting demand (feed, ethanol and export) lower allowing for a notable reduction in projected end stocks vs 2007/08 levels. 
    USDA 2008 Outlook Forum projected end stocks were estimated at a level of 1.243 billion bu and $4.60/bu season average farm price vs Allendale's estimate of 482 mil bu and $6 SAFP based on average weather. Based on the poor rate of plantings in 2008, Allendale estimates end stocks could find reason to be as small as 211 mil bu vs 426 mil bu in 1995. Ironically 1995 also had a unique slow planting pace, but ultimately its crop was decimated by a mid summer drought.
    Conclusion: Allendale's research suggest look for USDA to lower its yield estimate, not planted acreage in the May 9th WASDE. Even though Allendale's supply demand projections are able to support a 62% or greater reduction in 2008/09 end stocks vs 2007/08, we doubt USDA to be as sympathetic.

Implications: Could delayed corn plantings have a dramatic impact on short term corn futures price direction. History has shown divergence in December corn futures price direction.  

Analysis:  The Question Was Asked: with Monday's (4/21/08) National Agriculture StatisticsService planting progress report at a sluggish 4% complete, (17% five yearaverage) are there any other recent years when the pace was this slow andhow did new crop December futures respond beginning in late April?      
    In 1993 (great Midwest Flood), by late April, new crop Dec futures hadreached $2.50 per bushel and sold off very steadily to $2.25/bu by the monthof June for a 10% decline. By the middle of the month of May when plantingsare typically 75% complete, in 1993, corn plantings had only reached 40%and yet futures continued its southbound decent. End Stocks to Use in 1993were 11.2%, vs a present level of 9.8%.     
    In 1996, by late April, new crop Dec futures had reached $3.45 perbushel and after a brief sell off to $3.25, rallied into June to a level of$3.70/bu for a 7% increase. By the middle of the month of May when plantingsare typically 75% complete, in 1996, corn plantings had only reached 22%.End Stocks to Use in 1996 were 10%, vs a present level of 9.8%. 1996 Deccorn futures reached its life of contract high by July in the $3.90's.
    In Conclusion: if you were to use a 1993 pattern present corn futurescould sell off 10% to a level of $5.57 by June or if the 1996 is moreincline then a rally of 7% could be in the cards to a level of $6.62.

Implications: Corn plantings for 2008 are in unique company but research suggest it may be premature to panic. Recent historical data suggest planting delays may not impact the final yield.

Analysis:      With 2% of the nations 2008 corn crop planted, concern is building regarding the lag verses a five year average pace of 7%. Near term weather forecast suggest continued delays may be in order as two more notable weather systems are expected to pass through the major Midwest within the next ten days. 
    The present planting progress for week 16 of the calendar year may be notably below the five year average but is better than 1996’s 0% and is identical to 1993’s 2%. Allendale needs to note 1993 was the year of the great Midwest floods which reduced year on year corn production by 33%. 
    In looking at the most recent five year average, from week 16 to week 17, planting progress typically increases by 11%, 16% the next week, 24% pace increase from week 17 to week 18 and 18% the following week to achieve an average slightly above three quarters complete. 
    Based on the present planting pace and including the average weekly gain, by week 19, the US corn planting pace may reach 71% vs a five year average of 77%. Allendale suggest, at present it may be a bit premature to push the “planting delays” panic button. However with each new weather forecast of cooler, wetter weather, average growing performance may be in question. 
    Most recently in 2002 and 2003 the planting pace for week 19 were 62% and 64% respectfully. In 2002, corn yield was 8.2 bushels per acre less than 2001, however 12.2 bushels per acre better in 2003 over 2002. Allendale would regard the slow pace of planting inconclusive to yield potential based on the aforementioned data.
    Allendale will continue to monitor weather forecast, planting pace and potential impact for spring planted crops and advise hedges and trading accordingly.

Implications: Even with odds suggesting corn acres may expand from the month of March to month of June, corn stocks could drop 67% from 2007/08 to 2008/09 marketing years.

Analysis:  From March to June: while the March 31st prospective planting report is still fresh, we need to apply recent Allendale Inc research to USDA's new acreage estimates. We know since 2004, USDA has each year increased acreage from the March to June report.

Our question is what could theacreage adjustment to corn supply and demand be?. For clarity purposes we will present the research in columns of adjustments and use Allendale'ss upply demand estimates as USDA will not release is first official estimates for 2008/09 until the May WASDE.
                                  Mar 31st    Low End      Ave       High End
Acres Planted (mil)        86.01       86.193       87.495      88.448
Acres Harvested (mil)    78.31       78.475       79.660      80.528
Yield (bu/acre)              155.3         155.3         155.3       155.3
Total Supply (bil bu)     13.595       13.620       13.804      13.937
Total Use (bil bu)         13.113       13.113        13.183     13.278
End Stocks (mil bu)          482           507            621          659
End Stocks
to Use                            4%           3.9%          4.7%       5.0%
Season Ave
Farm Price                      $6           $5.90          $5.50       $5.40

Observation: our research suggest the minimum increase USDA has made since 2004 was 179,000 acres as detailed in the low end column and the largest increase last year of 2.43 million acres and over the past 4 years the average has been 1.481 million acres. Without any adjustment to acres from the March to June report, projected end stocks could be 482 million bushelsand with a max increase in acres, add 177 mil bu. The season average farm price projections suggest a high value of $6 per bushel and low end of$5.40/bu.

Implications: Recent La Nina weather history has surprising results on the USA corn yield.

Analysis:  According to USDA's meteorologist there have been 8 La Nina years since 1995. Our question is when La Nina occurs what impact has it had on yield from USDA's official first new marketing year supply and demand released in the month of May to the final yield for that same marketing year. 
    We have discovered the facts are five of the eight years found the final corn yield larger than the initial May estimate. 
    Based on an average increase in yield of 1.3% Allendale's estimate suggest ending stocks of 806 million bushels vs Allendale's present estimate of 617 million bushels.
    2005 had no change between May and the final yield. Two of the eight La Nina years had an ave reduction in yield of 4.9% and would suggest 2008/09 end stocks of 249 million bushels. 
    Of the two down years, 1995's reduction was 9.6% and 2000 was down 0.1%. This may likely have something to do with improving corn genetics. 
    In conclusion La Nina may have a perception of poor yields when in fact, research suggest odds are 75% of unchanged to higher yields in La Nina years.

Implications: Wheat quality conditions may limit 2008 production. Adding four to six million more acres may be of little help. Wheat value expected to firm into 2008

Analysis: Wheat Conditions: a good portion of the fundamental reason behind the strength in the wheat futures has been the declining US crop conditions for the winter wheat. The standard in the industry is "its tough to make a poor quality crop poorer and tough to make a great crop greater".     

According to Allendale Research, the saying needs a challenge. The National Agriculture Statistics Service has likely released its last crop condition report for 2007 and will pause until spring of 2008 to resume its weekly findings. In its most recent finding NASS estimates the
2007-08 winter wheat crop at 44% good to excellent vs a five year ave of 59% and year earlier rating of 53%.

First of all, dating back 1986, the present 44% rating is the third lowest with only 2000 and 2002's 43% good to excellent and 1989's 32% good
to excellent rating weaker. Our questions are, when quality ratings resume, how much if any improvement is that first spring time rating, can the spring and summer growing season help improve ratings, how do the ratings fair in the end and what if any impact could those rating have on final yield?

For the 1989 crop initial spring time ratings dropped a percent at a level of 31% good to excellent and finished the year at 27% good to excellent and yield dropped 1.4 bushels per acre less than the previous
year and the yield of 32.7 bpa was 2.6 bushels per acre less than the
previous five year ave.

For the 2000 crop initial spring time ratings increased 14 percent at a level of 57% good to excellent but finished the year only 3% better than
the dormancy level of 43% good to excellent and yield dropped .7 bushel per acre less than the previous year and the yield of 42 bpa was 1.3 bushels per acre better than the previous five year ave.

For the 2002 crop initial spring time ratings decreased 12 percent at
a level of 31% good to excellent and finished the year at 28% good to
excellent and yield dropped 5.2 bushel per acre less than the previous year and the yield of 35 bpa was 5.6 bushels per acre less than the previous five year ave.

When conditions are as poor as they are at present, three of three
years had the following years yield less than the previous year and two of the three years had yield less than the previous five year average.

The most recent yield estimate for the 2007 wheat crop is 40.5 bushels
per acre and with less than average quality ratings, yield for 2008 could
average 38.1 bu per acre vs 2007 and 38.2 if based on the previous five
year ave.

July Futures: from Nov to June for 1989, July wheat futures gained 40
cents with a max peak of 60 cents from Nov to May. From Nov to June for 2000, futures gained 12 cents with a max peak of 25 cents in late Feb and in 2002 futures gained 5 cents. We need to mention, end stocks to use were a minimum of 4% to a maximum of 14% larger than present day.

Conclusion: at present the US is working with its third poorest winter
wheat quality ratings since 1989. Previous results suggest odds do not
favor the crop gaining quality for the spring-summer growing season. Odds favor the 2008 wheat yield could be an ave of 2.3-2.4 bushels per acre less than the 2007 yield. Present 2007 wheat production is estimated at 2.067 billion bushels. If all wheat acres increase by 4 million in 2008, poor quality wheat conditions may yield a crop size of only 2.074 billion bushels vs trend yield of 2.256 and if 6 million more acres are added, the crop size may only increase to a level of 2.139 billion bushels vs trend yield of 2.326 billion bushels.

Implications: US Midwest Corn Crop Good to Excellent Condition is Slightly Better Than Five Year Average Ideas Suggest the 2007 corn crop is made. Even at 78% pollinated, there is room for adjustment to final corn production.

Analysis:     Allendale is very much aware of the numerous times over the past week to ten days of major media articles suggesting the 2007 corn
crop production is made. Allendale's position on such a statement is in a word ridiculous. Allendale suggest the greater Midwest crop to be very much mostly pollinated by the end of July but the crop is expected to need additional moisture in the month of August to fill kernels, add test weight. The question is, could the corn crop yield per acre shrink or grow from the August USDA crop production report vs the January annual crop report? 
    Based on the most recent ten years of historical data the answer is
yes, 30% odds the yield per acre could be less in the Jan annual crop
production report vs the August estimate. 70% odds of the yield to be
greater in the Jan annual report vs the August report.
    At present Allendale is using a 149.3 bu/acre trend yield vs USDA's
most recent 150.3 bu/acre trend yield estimate. 30% odds over the past ten years suggest the ave yield per acre drops 2.9 bu per acre, which by using Allendale's present yield a crop production estimate of 12.505 bil bu crop vs our present estimate of 12.753 bil bu. The smallest correction in the three years when yield dropped was .9 bu/acre suggesting a crop size of 12.676 bil bu. The largest correction for the three years was 4.8 bu per acre in 2000, suggesting a crop size of 12.343 bil bu. 
    70% of the time over the past ten years, the yield from August to Jan
annual has increased an ave of 5.4 bu per acre suggesting a crop size of
13.214 bil bu. The smallest upward revision has been 1.7 bu/acre in 1997, suggesting a crop size of 12.898 bil bu. The single largest upward
correction from August to the Jan annual report has been 11.4 bu per acre, suggesting a crop size of 13.736 billion bushels. 
    The big picture suggest the small end of production of 12.343 billion bushels with the high end of 13.736 billion bushels, for a spread of 1.393 billion bushels.
    Interesting to note is how this production spread closely resembles Allendale ending stock projection for 2007-08 or 1.367 billion bushels.
    To conclude, Allendale suggest the crop is not "made" and weather is expected to continue to be the key to success or failure.

    For every 100 Million Bushel: We recently re ran a study from several years ago to attempt to determine the season average farm price cash adjustment for an increment change of 100 million bushels in ending stocks. The study was spot on as it continues to suggest for each 100 million bushel adjustment in end stocks, the end result is 4 cents in the season ave cash price. Thus if end stocks were to decrease 500 million bushels, Allendale would suggest the season ave cash price to increase by 20 cents. Conversely if the projected end stocks were to increase by 500 million bushels, the season ave farm price to decrease by 20 cents. At present Allendale projects the season ave farm price to be $3/bushel.

Article Submitted 07/24/07

Joe Victor
Allendale Inc

Implications:  

Leading Agriculture Seed Companies at Risk

The Potential Import ban of US grain-products

Analysis:

    Two of the United States leading corn seed companies are gaining attention from foreign importers of corn processed products-foods. Both seed companies have specific genetic traits imprinted within corn seed varieties which help to ward off insect pest and reduce pesticide cost, but have resulted in concerns by the global trade.

    As described within the Australian news article, a renewed investigation of food imports made from genetically modified corn from a specific US corn seed company, is gaining attention. Research data performed in Germany regarding the same trait did suggest some alarming results. The results of the research were surprising and very well could prohibit or slow imports of food manufactured from the US genetically modified corn in question.

    During last falls corn harvest, the European Commission alerted another US corn seed company that it would be watching closely if imported distillers dried grains from ethanol processing, arrived at European port facilities. The EC had not yet approved of the trait which could potentially enter the livestock feed sector. In contacting the EC late in 2006, signals suggested the approval would not come until late 2007. If the trait was found within distillers dried grains imported from the US, the shockwaves could prove disastrous to US corn prices as Europe imports the great majority of half of all distillers dried grains produced within the US. Latest projections suggest approximately 28 million tonnes of DDG to be produced from ethanol processing for the 2007-08 marketing year.

    Fortunately for the US corn seed grower, they did not have to
wait until the end of 2007 for approval as on March, 3^rd the EC granted the allowance. It could have proven disastrous if not allowed as the theory USDA suggest is for every pound of DDG fed to livestock, the DDG replaces approximately half of a pound of corn designated for livestock feed use. Allendale Inc does need to include, there are discussions within the USDA that the replacement could be massaged upwards of nearly three quarters of a pound. If the EC or any other importer of DDG banned the importation of US distillers dried grains, it could increase US stock piles of DDG and compete head on with US corn for feed to livestock and weaken US corn futures and cash prices.

    It appears as though one major seed company has dodged a bullet while the other waits in the wings for findings within Australia. As US seed corn companies strive to increase corn yield to help satisfy the corn for food, fuel, and export markets, these new genetic traits are likely to come under extreme scrutiny. The positive is nearly 80% of all corn produced within the US is consumed domestically. However as the annual corn supply is commingled at each harvest, there is always the chance an unapproved trait may be discovered and banned on foreign soils and the backlash may prove disastrous for not only the US corn market but its seed developer as well.

Implications:  

Expanded planted corn acres in 2007 could result in smaller end stocks

You were paying more at the gas pump, but now it may be more at the grocery store and restaurants.

Food Industry doing more with less

Analysis:

In a recent nationwide survey of farmers by Allendale Inc to discover their planting intentions for 2007, it resulted in an increase of 12.46 million more acres to be planted above the 78.3 million acres planted in 2006. If the US farmers follow through with their intensions, the US is estimated to produce 12.356 billion bushels of corn. Add in old crop stocks and imports, the total supply for the 2007-08 marketing year arrives at 13.140 billion bushels. Demand for corn in 2007-08 for ethanol is expected to increase 53.4% however with present high prices for new crop corn at ten year highs, livestock feed use is expected to decline along with exports. Allendale Inc project total demand for corn for the 2007-08 marketing year to be 12.55 billion bushels and this leaves end stocks of 590 million bushels, which is less than the 2006-07 end stock projections of 752 million bushels.

We can increase supply by increasing yield per acre as well as adding more acres at the expense of reducing soybean and spring wheat acres. With better yields, supply increase end stocks to a level of 793 million bushels and by adding 1.6 million more acres with a similar yield, end stocks arrive at a level of 912 million bushels, drawing ever closer to the key futures sell off point of end stocks more than 1 billion bushels.

In 2006 with crude oil prices very near $80 per barrel and cash corn prices of $1.80 per bushel, ethanol companies were processing corn into ethanol with very healthy profit margins. More recently with $60 barrel crude and cash corn prices of $4 profit margins although still in the black, have paused an undetermined amount of planned new ethanol plants. More importantly than the supply of corn is the supply of water issue to raise a healthy corn crop as well as assist in the manufacturing of ethanol.

High gasoline prices at the pump, prompted more ethanol production. However since corn futures and cash prices began to rally contra seasonally during the fall harvest, profit margins fell aggressively. It is the harvest window which end users of corn for feed, exports and fuel most aggressively purchase its needs. Livestock and poultry farmers are feeling the pinch of high cash corn prices and rather than operate in the red, its end product is curtailed via less production. The unit numbers of cattle and poultry are down and expected to require less feed use in 2007-08 according to Allendale Inc and USDA early estimates. Higher corn feed cost are expected to raise commonly used every day foods such as eggs, milk and cereals. High input cost for these items, translates into higher cost at the store and the same ill feeling you felt at the pumps in the summer of 2006, are now experienced at the grocery store checkout lines and restaurants.

One major soft drink manufacture recently announced a reformulated corn sweetener to be put into production in 2007 which is expected to use less corn. The manufacture suggested, up until present, higher cost of the sweetener has simply been passed onto the consumer, but is expected to reach a breaking point. Therefore, the soft drink manufacture will need to explore other non corn based sweeteners. Yet another major manufacture of ketchup is thinking along the same lines as the soft drink manufacture. Corn sweetener has become too costly.

The recent agreement between the US and Brazil to share in ethanol technology came as little surprise. However the trip did produce one particular remark by Brazil corn producers. They suggest if the US needs corn to produce ethanol, then maybe the US could consider importing corn from Brazil. How ridiculous a statement to even consider the number one producing country in the world to import corn. Allendale Inc looks back to the summer of 1997 when the number one soybean producer in the world, the USA, imported several cargos of Brazil soybeans as a result of sky rocketing prices. The absolute disbelief in 1997 could reappear nearly 10 years later but this time for the USA corn industry. It needs to be noted both Argentina (#2 world corn exporter) and Brazil (#2 soybean exporter) are both in the beginning stages of harvesting record corn and soybean crops in both countries.

We are not suggesting it may be a major commercial grain company to take the lead but would not rule out a significant processor of corn, as a service to its end users to keep prices under control.

To summarize, although the investment community may be enamored with the prospects of the value of corn as the primary feed stock for ethanol, one must look beyond the tree, to see the forest.

Joseph Victor

Implications: > the entire world investment community is enamored with prospects of alternative fuels.

> USDA's 15year baseline projections, call for a 49% increased in corn use for ethanol

> how the stocks of ethanol are building at a faster rate than production.

> The combined operating, new construction-expansion, permitted and planned plants would have the capacity to produce 26.294 billion gallons of ethanol which would require 9.75 billion bushels of corn.

Analysis:

    Ethanol: 1st the very obvious, the entire world investment community is enamored with prospects of alternative fuels. More directly to the agriculture community is the prospects of increased demand, more strain placed on an already tight stocked corn inventory. 
    Held within USDA's 15 year baseline projections, call for a 49% increased in corn use for ethanol in the 2007-2008 marketing year. For 2006-07, USDA forecast corn use for ethanol at 2.15 bil bu (up 34% over 2005-06) and have not increased it's demand estimates even though an ave of 2-4 new plants coming on line each month. There may be a good reason why. 
    According to the Energy Information Administration (report ethanol production and stocks levels) for the first three months of the marketing year, production is not keeping pace with USDA and Dept of Energy's target.
    As mentioned this years corn use is projected 34% higher than the year before 1.603 bil bu. For the month of Sept, corn use was only 27% higher, Oct 24% higher and Nov 24% higher. As you can see because of the lag in reporting by the EIA, USDA has no reason to revise corn usage off the 2.15 bil bu. It was during these 1st three months, corn futures were rallying while crude oil was dropping. Very likely ethanol plants scaled back on operating efficiency as profit margins came off of $7 net per bushel highs in the summer of 2006 to recent lows of $1 per bushel. 
    Production and Stocks: at 10.3 million barrels of ethanol produced for the months of Nov and Oct of 2006, they represent record production. Oct's 10.3 million barrels is 2 million barrels more than Oct of 2005. The same is true for the month of Nov. Interestingly at the same time ethanol production was clipping higher by 2 million barrels per month, we need to look at stocks levels to see how its barometer is operating. 
    For the month of Sept 2006, ethanol stocks were 4.4 million barrels more than Sept of 2005, Oct 2006 stocks of 9.8 million barrels were 4.2 million barrels higher than Oct of 2005 and in Nov of 2006, stocks were 3.5 million barrels more than yr earlier levels. Two observations, #1 is how the stocks of ethanol are building at a faster rate than production. #2 is if there is a glimmer of positive news is how from the Sept and Oct levels, Nov stocks did at least drop showing signs of usage.
    The Big Ethanol Picture: as the stocks out pace production it is important to know, just how much ethanol needs to be produced for 2007 consumption. This is where Allendale's research relies upon official Dept of Energy records. After using 141 billion gallons of gasoline in 2006, the DOE anticipates (and this is extremely current data) the 2007 gasoline use to be 142 billion gallons. This suggest 5.6 billion gallons of ethanol will be needed to blend for total gasoline and ethanol usage for 2007 of 147.9 billion gallons. To leave present ethanol stocks unchanged, this 5.6 billion gallons of ethanol could require 2.07 billion bushels of corn when using a conversion factor of 2.7 gallons of ethanol from one bushel of corn.
    With 107 ethanol plants currently on line and operating, its production capacity is 5.789 billion gallons, surpassing the 5.6 billion gallon ethanol target, and still would be able to add a few stocks. As long as all 107 operating plants remain on line, its capacity could require 2.144 billion bushels of corn.
    Now do you see how USDA may be stuck on its 2.15 billion bushels of corn use? By 2010, the DOE is estimating 10.6 billion gallons of ethanol will be required to blend with the 146 billion gallons of gasoline to be used. 10.6 billion gallons of ethanol will require 3.93 billion bushels of corn IF all ethanol at the time is made strictly from corn. We look at the 15 year baseline projections released by the USDA and it suggest corn use for ethanol will be 4 billion bushels of corn. Once again, it may become more apparent where USDA is pulling its corn use estimates for ethanol from. 
    There are approximately 67 plants under construction or in expansion phase. These 67 plants have the capacity to produce 5.136 billion gallons of ethanol. Add in the 107 plants currently operating and we have total production capacity of 10.9 billion gallons which can meet the 2010 target. 
    One last scenario to work on. By 2017 the DOE suggest 11.5 billion gallons of ethanol will be needed to blend with 161 billion gallons of gasoline. This 11.6 billion gallons of ethanol will require 4.3 billion bushels of corn if all ethanol is to be derived from corn. Presently there are 88 ethanol plants in the process of obtaining building permits and another 71 ethanol plants in the planning phase. The combined operating, new construction-expansion, permitted and planned plants would have the capacity to produce 26.294 billion gallons of ethanol which would require 9.75 billion bushels of corn. USDA's 15 yr baseline projections suggest 4.35 billion bushels of corn needed for the 2016/17 marketing year. 




    There are several points to ponder in the end. Some of those questions could be, what could the real value be of the planned and a portion of the permitted plants if production could far exceed demand. Could it be the US will need to mandate for all states a specific ethanol requirement to be blended as production out paces demand? Does the proposed $1.6 billion dollars of budgeted monies for cellulosic research temper the ethanol future plants plans?


 

Implications: Energy Information Administration suggests the market may be understating demand for ethanol.

Publicly held ethanol companies stock did not react well to EIA's outlook.

How is $75 crude oil that much different to inflation than $4 to $5 corn?

Analysis:

On Wednesday December 26th, 2006 the Energy Information Administration suggests demand for ethanol could reach 11.2 billion barrels by 2012! The projection for 2012 exceeds the 7.5 billion requirement of the Renewable Fuel Standard enacted as part of the Energy Policy Act of 2005. Prior to the Energy Information Administration's Dec 6, 2006 announcement, Allendale Inc's research addressed a hotly debated question regarding potential acreage needs to meet projected ethanol demand for 2007. For the past few weeks, we have been using estimates not publicly released, suggesting a 6 million acre increase is in store. Based on 84.6 million planted acres, 76.8 harvested, and a 150 trend yield it would appear 2007/08 ending stocks could total 277 million bushels. That is much tighter than the 935 estimate USDA is presently implying for 2006/07. Based on our trend yield estimate and demand numbers, it is clear those are not enough acres. Allendale references research completed in October. At that time, we compared the change in price in one year with the change in planted acres the following year. At that time, USDA was using a $2.60 forecast average farm price (cash, not futures) for corn. Based on $2.60 our acreage model implied a jump in acres for 2007 of 5.3 million acres. On the November supply/demand report USDA raised the season average farm price to $3.00. Filtering a $3.00 average cash price would equal 8.2 million more acres planted in 2007 over 2006. In less than two months, the SAFP estimate may already be outdated. It is important to realize all futures contracts through the rest of the marketing year (August 30, 2007) range from $3.70 to $3.94.

Corn What If: With that in mind we made our own model to forecast a season average price. We already have three months of the marketing year complete. Based on five year average marketing patterns, we will assume 32% of the crop has been sold from September through November. For December through August marketing, we forecast a cash price for each month. Futures prices were subtracted from the five year national average basis level for each month. In addition, basis has been 15 cents wider than those averages thus far this year. With this in mind we kept that 15 cent wider than usual basis on our projections. We also applied a weight to each month to track average farmer selling patterns. 32% of the crop is usually sold by the end of November. By the end of January, the biggest sales month of the marketing year, farmers are typically 54% sold.

The bottom line is our model suggests, at current prices, the average season average cash corn price may be closer to $3.33. That is substantially more than the $3.00 total USDA is currently using. The big question now is what effect could this have on next year's acres?

When using a 6 million acre increase and only a 277 million ending stock. If we use our acreage model, which suggests at $3.00 we could pick up 8.2 million acres, we would forecast ending stocks at 476 million bushels. At $3.20 we could pick up 9.6 million acres. If average prices actually are $3.33 we could pick up 10.5 million acres and would calculate a 640 million bushel ending stock level for 2006/07.
A few key numbers to consider are as follows. If we use the Department of Energy's most recent projections for 2007 planted acres dedicated to produce the required 5.6 billion gallons of ethanol for blending purposes is estimated to 18.5 million vs 2006 acres planted of 15 million. This 3.5 million acre increase over year ago levels is well within our Season Average Farm Price study results which most recently suggest a 10.5 million acre increase.

The question presented is will the US 2007 plantings over saturate the real need presented in the EIA findings? Consider the following, EIA most recent ethanol production and stocks data holds information which is not receiving much public attention. Most recent monthly production data suggest 10 million barrels of ethanol produced. This level compares to 7.8 million barrels produced for the same month, one year earlier. The 2.2 million barrel increase equates to a 27% increase. Most recent EIA data also reveals the level of ethanol stocks have reached a record high of 9.7 million barrels vs levels of 5.3 million barrels, the same month one year earlier for an increase of 83%.

Allendale Inc is well aware of the economic cash values of corn, ethanol and distillers dried grains which help determine profitability of producing ethanol. In 2006 we have witnessed a range of near $7 profit per bushel of corn processed into ethanol to the low end of slightly more than $1 per bushel. Provided several of the scenarios we have published within the context of this article, unless the feedstock of corn corrects lower and of the value of crude oil gains dramatically in 2007, investors of newly planned or permitted ethanol facilities could have some very tough choices to make, very soon.

Corn Summary: There are some points we want to make here. 1) Do not be surprised if 2007 corn plantings jump by 10 million acres. It can certainly happen. 2) For now we have to assume the 2007 corn crop could have even tighter ending stocks than this year. Overall we will assume 2006 through 2008 corn crops could have tight ending stocks and high prices. By 2009 there is a chance acreage growth and annual yield growth could start to change the picture. 3) Having said this bullish news and talking of this 2006 through 2008 sweet spot' we could have a down year. If we attract 10 million acres next year and we get that great 160 yield which was just posted two years ago we would forecast a 1.4 billion bushel ending stock. That could translate to an average cash price of approximately $2.50.

USDA-Energy Department: these two have some very difficult choices ahead. We have all experienced what impact high crude oil energy prices had on inflation and consumer spending. The Bush administration may have tough choices ahead which we believe both the Energy Department and USDA have several options to explore such as early release of Conservation Reserve Program acres, bringing forward genetics for corn and soybeans which may allow for larger crops thus placing less financial risk for end users which ultimately could allow food prices to remain reasonable. As it stands it may not take too much longer for the consumer to feel the pinch at the checkout line as corn is truly being tugged at from both ends, fuel and food. We believe USDA's new farm bill is certain to place a great deal of focus on using crops as a source of fuel with the concept of providing a more than fair cash price back to the farmer and placing less emphasis on government support programs. The idea here is to have the USA take the lead and prove to the World Trade Organization the USA is becoming the anti subsidy world leader and not heavily subsidizing crop production as well as prove to the consumers of the USA that it is not farm sector which is drawing on tax payers.

If you would be interested in learning more about this subject, Allendale Inc. will be conducting its 17^th annual outlook conference, “Capturing the Commodity Run.” For more information please contact your GLG Research Manager.

The thoughts expressed and the basic data from which they are drawn are believed to be reliable but cannot be guaranteed. Any opinions expressed herein are subject to change without notice. Those acting on this information are responsible for their own actions.

Implications: Wheat Fundamentals: The investment community's interest in the wheat futures is very strong on news of a shrinking Australian wheat crop, Ukraine curbing exports, with Russia expected to follow, Iraq and Egypt’s renewed interest in USA supplies as represented by its purchases the week of Oct 2^nd. The fact that Argentina’s wheat crop has responded to recent rains has taken some pressure off the southern hemisphere production.

At the beginning of the month it was estimated the funds combined futures and options position was 20,000 contracts long. The day in front of USDA’s October World Agriculture Supply Demand Estimates, the position had ballooned to 50,700 contracts. Just how many more longs could the funds add to its position is a commonly asked question since the beginning of this week. We reference our custom CFTC/Price report within our website and research shows, the funds have peaked twice prior to today at 50,000 net long. The first time was in late 2003 early 2004 when world stocks to use were tight corn, beans and wheat (presently projections are tighter for 2006-07 but only for corn and wheat) and then again this last summer when the USA had a small crop because of bad weather.

Analysis:

Pay particular attention to 2002 growing season for the 2003 March harvest. Present production estimates factored into the CBOT trade for the 2006/07 Australian crop range from 9 to 12 MMT, far below present USDA estimates calling for 19.5 MMT. The harvest of 2003 yielded 10.132 MMT as a result of the worst drought in 100 years. The year began with over 8 MMT of carry in stocks, had far less than normal exports and exited the marketing yr with only 40% of the stocks it began the year. How similar 2006/07 is in appearance, beginning with 8 MMT of carry in stocks, likely to see export potential cut in half and expected to end the year with just over 3 MMT of end stocks and not the 4.5 MMT projected by USDA. Of interest is the imports most years have been 75,000 tonnes with the exception of the strain of a shorter than ave crop had on the country and had imports of 286,000 tonnes. In summary, it is not out of the question recent rumors of Australian wheat imports could continue on the CBOT trade floor. We do believe it is important for the world to understand what potential levels of imports could be vs random guesses.

Troubled Exports: you are well aware of the fact that the USA sales pace this marketing year for wheat exports are down 23% vs last year and 27% behind the three yr ave. As of Thursday, 10-5-2006 sales have reached 387 mil bu vs 530 mil bu 3 yr ave. In the bigger picture, first quarter wheat export sales are down 21% vs last years first quarter sales. The weakness ties 1990-91 at down 21%. There is hope for a comeback to finish 2006-07 strong and actually have the ability to meet USDA export target of 900 mil bu. Dating back to 1987 we found three unique years where sales were at or very near this years weak beginning. In 1990-91 export sales performance was down 9% for the 2nd through 4th quarter but still managed to sell 1.049 bil bu. Two

other specific years had 2nd through 4th quarter sales outperform year earlier levels by 21% and 4%, both exceeding 970 mil bu. If we use the ave performance of the three specific years 2nd through 4th quarter performance and apply it to 2006-07, projections suggest at the end the USA could have enough resilience to sell 904 mil bu. USDA's 2006-07 marketing year target for wheat sales...900 mil bu. If we use the weakest historical performance of down 9% it suggest sales of 826 mil bu and if we use the strongest 2^nd through 4th quarter performance it suggest sales of 990 mil bu. There are some very early preliminary signs suggesting demand is looking away from Australia and more towards the USA. As long as weather keeps wheat production under stress for Australia, sales of USA wheat are expected to pick up some lost ground and help to support futures prices.

Wheat Technicals: The monthly chart below for CBOT wheat does show a futures market which has extended above 2002-03 levels when world end stocks to use for wheat registered 18.9% vs present projection of 17.4%. USA domestic stocks to use for wheat were 23.2% in 2003 vs present projections of 21%, but well above the 1996 levels of 15.8%.

In Summary: CBOT, KCBT and MGEX exchanges wheat futures have attracted global investment attention and rightfully so given the development of the Australia’s role as the world number three exporter status, year in and year out. However, similar to this past years performance of sugar and energy futures, high prices can stimulate the worlds interest in adjusting stocks to use and is expected to be addressed by world suppliers. Harvest will begin soon for number three world exporter Australia and number five Argentina. Number one exporter USA typically harvest its winter planted crop in the summer along with number two exporter Canada and number four Europe. Signs of economic rationing have developed this week of 10-9-2006 as Japan announced its weekly wheat tender will drop to 40% of normal, while S Korea announced it will remain sidelined from buying wheat because of over inflated prices which do not match up given the present supply-demand dynamics. Major wheat millers within the USA have alluded to the possibility of already covering its needs through the summer of 2007 as a result of its recent 2002-03 experience. Present price ratios between the three main crops within the USA as well as the world, clearly suggest to its growers a recovery is in the making for 2007 as winter wheat crops are presently planting. Recent history has shown when stocks tighten, and prices rise, not only the USA but world is fully capable of responding in major league fashion…