Dr. Robert Wisner: Grain Outlook 3/15/06 Iowa State University AgMarketing Resource Center AgMarketing Resource Center Grain Outlook for /21/08 Dr. Robert Wisner, University Professor & BioFuels Economist

Bio-Fuels: A Global Development 41 Countries encourage biofuels Driving Forces: –High crude petroleum prices –Concern over green-house gas Emissions –Government policies –Energy security

Global agriculture shifting from food & fiber to food, fiber & energy output Grain-based ethanol – first phase Shift requires sharp increase in grain, oil crop supply Adjustments in livestock production Oil price shock increases food costs Tightening supplies + weather variability add food-feed price volatility

Corn-ethanol only partial solution to energy challenges  Other feedstocks needed Municipal wastes Animal agriculture wastes Forest product wastes New crops  New automotive technology Hybrid gas/electric vehicles New engine & vehicle designs Hydrogen fuels & fuel cells  Diversification of energy sources  Incentives for increased mass transportation  Wind power use increasing

Key Determinants of Grain- Based Biofuels Industry Size Crude Petroleum Price Grain & Oil Crop Prices Needed for Increased Area & ProductionGrain & Oil Crop Prices Needed for Increased Area & Production Crop Inputs Availability & Cost Government Mandates

Recent Start-ups & Soon to be on Line U.S. Ethanol Plants Location Mil. Gal. Cap. Date Pikely, CA 40 AprilPikely, CA 40 April Lima, Ohio 54 MarchLima, Ohio 54 March Greenville, OH 110 MarchGreenville, OH 110 March Hennepin, IL 100 AprilHennepin, IL 100 April Cambria, WI 40 AprilCambria, WI 40 April Coshocton, OH 60 MarchCoshocton, OH 60 March St. Ansgar, IA 100 MarchSt. Ansgar, IA 100 March Monona, IA 100 AprilMonona, IA 100 April Volney, NY 41 May-JnVolney, NY 41 May-Jn Total 645

Recent Positive Developments in Biofuels Demand 2007 Energy Bill & mandates & a mechanism for implementation New Union Pacific rapid ethanol train receiving & unloading facility in Dallas North Iowa ethanol shipping facility Opening of substantial ethanol market in Florida and movement toward opening other southeast markets California state government commitment to reduce green-house gas emissions Higher gasoline prices?

Grain Market Outlook 2008-’10 Driven by global biofuels & U.S.-foreign wheat/weather problems Multi-yr. global battle for crop acreage: corn, soybeans, wheat, cotton, others Soy Prices: need for extra 7- 9 mil. U.S.Soy Prices: need for extra 7- 9 mil. U.S. acres in ’08 Other crop prices supported by SB, corn Record-high ‘08 guarantee prices for revenue insurance Bio-fuels future: support from crude oil prices & energy bill

U.S. corn supplies adequate to meet demand Crop up 24% -- 20% increase in corn acres But at expense of: –16% decline in soybean planted area –29% decline in cotton area –8% decline in non-durum spring wheat –Declines in minor crops Soybean supplies tighten substantially, increased plantings needed in 2008Soybean supplies tighten substantially, increased plantings needed in 2008 More U.S. corn will be needed in 2009,More U.S. corn will be needed in 2009, 2010, 2011

Enough Bean Acres Bought?

West Texas Intermediate Crude Oil dollars/barrel (monthly average price)

U.S Energy Bill U.S renewable fuels production: 4.7 bil. gallons For 2008: Requires U.S. renewable fuels production at 9 bil. gallons For 2009: 11.1 bil. gallons For 2015: 15 bil. gallons corn-based ethanol (57 bil. liters) For 2009: 500 mil. gallons of biodiesel (1bil. Gallons for 2015)For 2009: 500 mil. gallons of biodiesel (1bil. Gallons for 2015)

Source: Dr. Terry Francel, American Farm Bureau Federation & U.S. Energy Dept.

Price Outlook, Grain, 1/17/08 Irregular uptrend in corn & bean prices into mid-February Markets very volatile as South American growing season & Northern Hemisphere wheat progress Look for Corn & Bean markets to over-react on up-side with battle for 2008 crop acreage Look for stronger corn & bean basis in spring & summer Soy prices not yet high enough to boost A. Wheat: Sensitive to U.S./ foreign weather

Keys to Grain Markets 1.Ethanol profitability -- Infrastructure & transportation -- Negative margins ahead -- how long & how bad? 2.Govt. biofuels mandates to support corn 3.Strong Export sales—better foreign weather? 4.World Economy? 5.EU opening up 10% set-aside in Battle for acreage: S. Am., EU, U.S. wheat, SB, Cotton, & Corn

Cautions in Grain Markets 1.Fund Traders 2.Bio-diesel economics not good, no mandate until Domestic user returns tighten with higher corn prices – livestock & fuel

Risks: 2009 & 2010 Crop Sales Production Costs Some of new-generation contracts not tested in extreme mkt. conditions Weather (Strongly consider harvest- price revenue insurance)

Ethanol, demand growth & food inflation shifting China from to corn exporter to importer? 41 Countries Encourage Biofuels

Corn Yield to Affect China Export Availability

Big Picture Impacts Changes in crop rotations: more monoculture agriculture Upward pressure on food & feed costs -- U.S. food inflation -- demand pull so far -- Non-U.S. food inflation -- cost push Global adjustmentsGlobal adjustments – In livestock: more production from forage, less intensive grain feeding –Land clearing

U.S. expansion Continuing Changes in U.S. Ethanol Plants, 7/27/07 to 1/08/08 (From DTN) 1/8/08 3/14/08 7/27/07 11/6/07 1/8/08 3/14/08 U.S. Opr. Plants Under Const Planned plants Total

Production Total Use Ending Stocks, % of Use World Stocks are Record Low -- USDA

World Stocks are Near-Record Low -- USDA

Declining but not yet record low

U.S. R-O-W World Supply Tightening

Total Utilization

Historical & Needed U.S. Corn Yield Deviation Needed From Trend Other Considerations: Sharp increase in marginal Corn acres  Very tight fertilizer supplies  Corn-on-corn yield drag  Low C-o-C yields in bad weather

Lower productivity land Conservation Reserve Land

Source: FAPRI estimates Pulls land away from food uses (Growth = 147% of U.S. soybean oil exports) (Food demand for vegetable oil highly inelastic)

International Impacts U.S. ethanol plants under construction to use 2.0 bil. bu. of corn (almost doubling use) –Over 3 times the volume of Japan imports of U.S. corn –105% of 2007 EU corn crop –54% of global corn exports Higher food costs ahead Major risk-management challenges in Ag. & bioenergy

U.S. Cellulose Ethanol At least 3-4 pilot plants being developed Government emphasis on alternative feedstocks Potential Feedstocks: DDGS fiber Corn stover Prairie grasses Sugar, sweet sorghum Forest wastes Municipal & livestock wastes Research for major handling & storage challenges

Weekly ethanol futures

Daily ethanol futures to 3/17/08

Monthly CRB Index Incentive for Index Fund Traders to buy Commodities for inflation hedge

Week U.S. Dollar Index: Reduces grain prices in world markets

Weak U.S. Dollar Index: Reduces grain prices in world markets

Dec. ’08 Corn Futures 3/17/08 Possible Objectives: $5.41, $5.25, $5.15? Double Top

Nov. 08 SB Futures Prices, 3/17/08 Objectives: $11.70-$12.10?

Infrastructure lags

Total 11,693 mil. Bu. Figure 3.

U.S. Grain Export Sales to 3/06/08 Corn +29% vs. year ago HRW Wheat +118% SRW +54% HRS +33% All Wheat +52% Soybeans 00% Barley +89% Sorghum +138%

Capacity: 159% of 2006 Crop Iowa Corn Processing Plants, Current & Planned, 7/25/07 72 Potential Iowa Plants 11 Just across IA Borders Figure 2.

Basis Examples, Corn 9/28/07 Garner Kebler Milling Hobartan Global Lakota (ethanol) Algona Emmetsburg - Ethanol Range Harv. Delivry July Delvry 3.18 (-.55) 3.66 (-.42) 3.41 (-.32) 3.86 (-.22) 3.29 (-.44) 3.80 (-.28) 3.28 (-.45) 3.73 (-.35) 3.20 (-.53) 3.66 (-.42) 3.33 (-.40) 3.78 (-.30) N.C. Iowa

Basis Examples, Corn 9/28/07 Coon Rapids ethanol Denison ethanol Creston Elevator Corning ethanol plant Bunge, Council Bluffs Onawa Lamoni Shenandoah eth. plant Range Harv. Delivry July Delvry 3.27 (-.46) 3.74 (-.34) 3.51 (-.22) 3.84 (-.24) 3.30 (-.41) 3.78 (-.28) 3.32 (-.41) 3.85 (-.23) 3.29 (-.44) est (-.33) 3.43 (-.35) N.A (-.53) N.A (-.24) 3.95 (-.13) W.C. & Sw. Iowa

Add biodiesel Now $0.65

Source of USDA Ethanol Plant Prices Corn DDGS Ethanol

Take-Home Points Grain Markets: driven by energy prices Current corn supplies adequate Major concern about tight ‘08-12 corn supply World Soybean & wheat supplies very tight More soybeans, wheat (cotton?) likely to reduce corn acres in 2008 Acreage battle likely to intensify in 2009 & 2010Acreage battle likely to intensify in 2009 & 2010 Higher govt. biofuels mandate supports ethanol infrastructure capacity & Profits

Take-Home Points: II All grain markets extremely sensitive to U.S. & foreign weather ISU Climatologist Elwynn Taylor sees 70% probability of below trend ‘08 U.S. corn yield Corn & SB basis likely stronger, May-August Strong basis creates high risk for livestock feeders Options Mkts. more important than in the past Options look expensive, but out-of-money strike prices can provide upward price flexibility

Thanks! Questions?

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