‘Splash and Dash’ - Now maybe ‘Blend and Send’

We are told the salvation of the US economy is development and implementation of new technologies. We need to continue to develop new approaches as other countries are allowed to use our technologies in lower cost environments, pricing us out of the market. Others must be getting better at the adoption of these new approaches because it seems like we are unable to hold a superior position for as long as we have in the past. Many industries require US tax payer (Government) support to become established. The bio-fuels industries are one of those industries. It is disheartening to have our tax dollars supporting foreign businesses. Ships loaded with foreign manufacture bio-diesel sails into a Florida port adds a small amount of petroleum based diesel, becoming eligible for a tax credit, then sailing for delivery and use in another country. . This event is known as ‘Splash and Dash’. It is estimated the American Taxpayers paid hundreds of million dollars last year for this loop hole. The President is believed to of signed a bill on October 3, 2008 that disallows the credit in ‘Slash and Dash' situations. (The bill may not be WTO-compliant.) The tax-payer funding of foreign ethanol industry may occur should the $0.51 tariff on imported ethanol be removed and the blender credit remain in place. A tanker of foreign ethanol could sail into a Florida port, add a small amount of gasoline, receive the blending credit and sail to a foreign port for delivery and use; ‘Blend and Send’.

If the import tariff goes maybe it is time to remove the blender’s credit. The ethanol industry has not been able to have the “Pricing Power” we expected. Their production has pretty much always out paced the mandated use resulting in supply over the mandated level. This has placed the oil companies in a stronger pricing position resulting in lower ethanol prices than we expected (the lower etanol price has not been seen at the gas pump with “No Ethanol added” gasoline selling at the same price as Gasohol). If we think of the blender’s credit as increasing ethanol use over the mandated level, then the US tax payer is paying $2.25-4.50 /gallon for ethanol consumption over that mandated level. (US mandated level has been about 80-90% of US production capacity. ($0.45/(1-80%) = $2.25/Gal, $0.45/(1-90%) = $4.50/Gal).) A better approach might be to increase mandated levels (removing some of the oil companies pricing power and proving an opportunity for larger margins for US ethanol production), drop the blending credit and open the door to tariff free imports. The increase demand would increase imports and increase “Acre Wars” in South America. This should reduce South America’s corn and soybean acres (hectors) available for export giving the US more opportunities to export grain and meats resulting in high prices.

We are in the process of exporting another industry. We need to position ourselves to take advantage this change. That positioning might change crude oil corn pricing to one that is based upon sugar cane.

Get ready for a corn shortage next year. The world only has a 30 day supply of corn. Farmers are not going to plant new corn crops at the current prices because they could loose a ton of money. Also, the banks will not loan them the money they need to plant next years crop because of financial crisis and current low corn prices. This will cause a worldwide shortage of corn next year and it will be a disaster. This will get ugly soon!!!!!

"Commodities Expert"? You had me until you said farmers were going to start "loose"ing money. When they start loosening it, who will tighten it back up?

Watch out for the Ethanol Juggernaut from Brazil!

What does Bill Clinton, BP (British Petroleum), ADM, Bunge, Cargill and the countries of India, Brazil, and United Kingdom have in common? No this is not a joke; especially for row crop producers. They are investing in Brazilian Sugar Cane / Ethanol Production.

Energy Information Administration’s Country Analysis Brief for Brazil updated October 2008 forecast Brazil’s ethanol production will reach 530,000 barrels per day (8.0 billion gallon per year) in 2009 up from the projected 440,000 barrels per day (6.7 billion gallon per year) in 2008. Their ethanol production in 2009 is projected to double their 2004 production. Roughly an additional 2.16 million acres of sugar cane will be needed to supply the 2009 increase in capacity, should all this increased production come from sugar cane. Brazil had 637 million acres of arable soils in 2007 with 15.3, 51.1, 33.6 million acres in sugar cane, soybeans and corn respectfully. So it is hard to gage the degree of acre shift and crop price changes that may occur, if any, with this increase in sugar cane demand.

USDA’s The Economic Feasibility of Ethanol Production from Sugar in the United States dated July of 2006, indicates that Brazil can produce ethanol from sugar cane for about $0.97 per gallon ($0.16 capital recovery, $0.51 processing cost and $0.30 per gallon feedstock cost). Ethanol from US corn at a dry mill plant was estimated at $1.17 per gallon ($0.12 capital, $0.52 processing and $0.53 per gallon feedstock cost). Brazilian Ethanol production had a $0.20 per gallon advantage over US dry mill corn production. The cost structure has surely changed since 2006. Corn at $3.00 per bushel would have a feedstock cost of around $0.78 per gallon after crediting back DDGS. Feedstock cost increase US cost by $0.25 per gallon for an estimated Brazilian advantage of $0.45 per gallon. (Sugar cane is harvested for several years after initial establishment without reseeding. So the increase production cost from 2006 to now is not expected to have the large increase seen in dry mill corn production.) Ocean freight cost from Brazil to New York is estimated to be within two to five cents of rail cost from Chicago. A little more strength in the dollar and one could see Brazil sugar cane ethanol being placed on the East Coast and maybe the West Coast cheaper the dry milled corn ethanol even after paying the $0.51 per gallon tariff (We may be there now. Average Brazilian Real value versus US dollar for July 2006, the date of cost report, was 2.18. Currently the value is around 2.37, an 8.0% decline which would make Brazilian sugar cane cost around $0.892 per gallon if all other factors remain constant. Dry Mill corn ethanol, with $3.00 corn is estimated at $1.42 per gallon with other cost factors (2006 dollars) remaining the same. That is a $0.528 per gallon advantage for Brazil or $0.018 per gallon Brazilian advantage after paying the tariff.)

To expect a sustainable increase in corn ethanol demand could be unrealistic should the current Brazilian ethanol production and currency trends continue. There is a saying around here; “Sometimes a hotel needs to file bankruptcy several times before the capital cost becomes low enough for the project to cash flow.” That scenario is occurring in parts of the US ethanol industry but that is not the salvation. The salvation may be . . . gasp it needs to be said, lower corn prices and / or high energy cost.

If one is able to follow the money, sometimes one can get a feel for what maybe in store for the future (other times you are totally miss led and worse off for the experience). It appears Brazil’s ethanol industry has attracted outside capital to help fund their goal of replacing 10% of the world’s gasoline consumption with ethanol by 2012 (USDA Economic Research Service’s Sugar and Sweeteners Outlook/SSS-249/June 4, 2007). That level of production, should it occur, will change Brazilian and US cropping systems.

Good point about following the money to sugar cane in Brazil. It would appear at least two of the world's top seed corn producers have figured this out. Monsanto and Syngenta are both developing technologies to make sugar cane production even more profitable and efficient. Both companies are heavily leveraged on corn right now, but they appear to understand that corn can only do so much for the world.