2018 ETHANOL MARKET OUTLOOK

Transcription

1 Moe Agostino (Chief Commodity Strategist) & Abhinesh Gopal (Commodity Research Analyst), supported by the Commodity Research Team February 16 th, 2018 Highlights 2018 ETHANOL MARKET OUTLOOK Ethanol demand for 18/19 is projected at a steady bil bu in USDA s longterm baseline projections for corn released in Nov They will give an update next week at the 2018 USDA Ag Outlook Conference but the USDA has increased ethanol usage by 86 million bushels since 16/17 and 17/18 sits at billion bushels. Production has been record strong but the issue remains weak exports and U.S. gas consumption which somewhat offsetting the record production. Ethanol exports have lagged last year's pace by 18%, driven mostly by a reduction in exports to Brazil due to a 20% tariff rate quota implemented in September. But it picked up during Nov.- Dec. period. A jump in gasoline consumption in 2018 or boost in ethanol exports could provide support for additional corn use for ethanol, but the USDA projection of billion bushels is reasonable under the current consumption levels. Fuel ethanol exports for September-December 2017/18 totaled million gallons, or slightly above the same period a year ago. China took 22 million gallons in December, to help boost exports for that month to the highest level this year. Brazil, the largest importer of U.S. ethanol, has taken 109 million gallons so far this year, nearly half of that in December. Strong demand helped stocks see a draw off nearly record-high levels off 604,000 to BPD down 2.6% vs. estimates for steady this week.

2 In 2017, ethanol accounted for slightly more than 10% of the U.S. gasoline pool, marking the second year in a row that the blend rate exceeded the blend wall. The pop in ethanol futures up +12.5% from the lows in December (thanks to a recover in crude oil that was unexpected) helped crush margins recover back to recent highs, with most Midwest plants able to earn 5-10 c/gal here, or c/bu, including fixed costs and cash inputs. This higher trend in futures is expected to continue supported by increased exports as China has increased imports of US ethanol. 17/18 U.S. ethanol usage for corn is projected up +1.58% Y/Y Located in 28 US states, 211 ethanol bio-refineries produced a record 15.8 billion gallons of renewable fuel in 2017, along with 41.4 million metric tons of animal feed and 3.6 billion pounds of distillers oil. A wave of new construction and expansions also swept across the industry in By creating value-added markets for nearly 5.5 billion bushels of corn, ethanol helped strengthen and stabilize a farm sector facing historic grain surpluses, decade-low commodity prices, and global trade uncertainties. Food and industrial use for corn were estimated at billion during the first quarter of the marketing year driven by excellent corn use for ethanol. During the first quarter, corn use for ethanol came in at billion bushels, up from the billion bushels used last year over the same period. (Please see chart below)

3 The weekly EIA ethanol report proved quite friendly for ethanol as production was off 3.9% down 41,000 BPD to 1,016,000 BPD vs. estimates for a 1% drop and this would utilize 5.45 billion bushels of "just corn" over an entire marketing year. Strong demand (particularly of the export variety) helped stocks see a draw off nearly record-high levels off 604,000 to BPD down 2.6% vs. estimates for steady. The pop in ethanol helped crush margins recover back to recent highs, with most Midwest plants able to earn 5-10 c/gal here, or c/bu, including fixed costs and cash inputs. After a slow start to the 17/18 marketing year, U.S. ethanol exports took off during Nov.-Dec. Fuel ethanol exports for September-December 2017/18 totaled million gallons, or slightly above the same period a year ago. China took 22 million gallons in December, to help boost exports for that month to the highest level this year. Brazil, the largest importer of U.S. ethanol, has taken 109 million gallons so far this year, nearly half of that in December. Last year, the Brazilian Government announced the imposition of a tariff rate quota for ethanol imports, where imports in excess of 600 million liters are subject to a

4 20-percent tariff. U.S. ethanol has been priced so low that it is still an economical alternative in Brazil, especially in the northern areas. (Please see charts below)

5 Top Destinations of US ethanol exports in 2017 Sources: U.S. Dept. of Commerce, U.S. Census Bureau, Foreign Trade Statistics U.S. DDGS exports are picking up, but still just steady vs. previous years During the first 4 months of the 2017/18 marketing year, Census trade data indicate total dried distiller s grain (DDG) exports of 3.8 million metric tons, is about the same pace as last year. During this period, Mexico imported 731,000 metric tons, up from 610,000 metric tons at this point last year. Thus far in 2017/18, Mexico has been the largest destination for U.S exports of DDGs. The use of corn dried distillers grains with solubles in commercial swine diets has increased dramatically resulting in substantial diet cost savings when used as a partial replacement for corn, soybean meal, and inorganic phosphorus. In fact, during most of 2017, DDGS was priced much lower than corn and soybean meal, which led many pork producers to strive for greater diet cost savings by increasing diet inclusion rates to 50 to 60% in grower-finisher diets. New technologies are now being implemented in some ethanol plants to produce high-protein corn co-products containing 40 to 50% protein. As a result, the protein content of these high-protein co-products is comparable to that of soybean meal (44 to 48%). (Please see chart below)

6 EPA kept the U.S. corn ethanol mandate unchanged in their late-2017 decision For the first time since 2013, the Renewable Fuel Standard s (RFS) conventional biofuel requirement was enforced as intended by Congress, leading to unprecedented consumption of E15 and blends for flex fuel vehicles like E25, E30, and E85. Ethanol production under the RFS provided a $14.1 billion boost in the value of the U.S. farm sector in 2015, or $6,800 per American farm. (Please see chart below) Gasoline demand for ethanol expected to remain steady at best In 2017, ethanol accounted for slightly more than 10% of the U.S. gasoline pool, marking the second year in a row that the blend rate exceeded the blend wall. In fact, several

7 states saw average ethanol blend rates well above 10% in Minnesota led the nation with an average ethanol content near 13%, while Iowa was second at approximately 12%. This clearly dispels the oil industry myth that ethanol should be limited to 9.7% of the gasoline pool. Nationally, ethanol consumption has grown from 1.7 billion gallons (bg) in 2000 to 14.4 bg in 2017, a 750% increase. Meanwhile, gasoline blendstock consumption has stagnated, registering at bg in 2000, dipping as low as 121 bg in 2012, and recently rebounding to 2000-era levels. (Please see charts below)

8 Ethanol demand is key towards supporting higher corn prices in the future but the EPA needs to change the law and allow more selling of E15 throughout the year not just during the summer months. (Please see chart below)

9 Managed Money Funds were record short in ethanol, but are covering those shorts now From being record long in early April 2017, managed money funds have been continuously reducing that net length to get to a record short position as of 2 weeks ago but we would not be surprised if they have since covered again, with futures having risen. (Please see chart below)

10 BOTTOM-LINE: U.S. ethanol demand and usage or 17/18 and 18/19 will not save the day with the larger than expected ending stocks but it can contribute towards a lower trend. It started with the surprise upgrade in the 17/18 export projections up 125 million bushels thanks to a drought in Argentina that sent 17/18 ending stocks down to billion. Reducing ending stocks, a further 352 million in the coming months to get back below 2.0 billion is a stretch but with higher feed demand the trend seems encouraging when you put them all together. A further increase of million bushels to billion bushels in 2018 is not that unreasonable reducing 17/18 ending stocks down to billion bushels. Growing gasoline demand expected to average a record high of 9.3 million bpd in 2018 and 9.39 million bpd in 2019 will allow more ethanol to be blended. A boost in ethanol exports could work off some of the domestic surplus as well. This in turn will continue to support a recovery in futures and margins to help production remain record high and surpass the USDA estimate at billion bushels! (Please see charts below)

11 Source: ETHANOL FUTURE PRICE TARGETS ALERT AS OF PRICE TARGET RANGE PER GALLON 1 st Half of 2018 $ $ nd Half of 2018 $ $1.65 Source: Farms.com Risk Management MARKETING RECOMMENDATIONS There are no new grain, feed, basis, livestock, diesel, or fertilizer marketing recommendations for today.

12 % Sold Tracker Module PLEASE NOTE: % booked refers to the average futures price of physically forward booked bushels but does not include your +/- local basis. % booked refers to the average futures price of physically forward booked hogs, cattle and feed forward but does not include your +/- local basis on hogs, cattle or feed Corn & Oats - 80% sold of 2017/18 crop on a basis only contract (futures open) for Canadian Producers, futures price shown here is average contracts' high Soybeans - 25% sold of 2017/18 crop at an avg price of US $10.03/cwt futures, 55% sold on a basis only contract (futures open) for Canadian Producers Canola - 25% sold of 2017/18 crop at an avg price of C$500.50/ton futures, 55% sold on a basis only contract (futures open) for Canadian Producers.

13 2017 MINN Wheat - 50% of 2017/18 crop sold when hanging orders triggered at avg price of US $8.315/cwt futures CBOT & KC Wheat- 100% of 2017/18 crop sold when hanging orders triggered at avg price of US $5.35/cwt futures Hogs - 100% sold thru mid-feb 2017 at an avg price of US $66.625/cwt futures (80% packer/20% sold futures or put options). Sold cash thru the remainder of the year but placed hanging orders above the market which were triggered- July high $84.75, and December at $ Corn Feed - 100% booked/purchased thru end of 2017 at an avg futures price of US $3.56/bu +/- local basis Soybean Meal - 100% booked/purchased thru end of 2017 at an avg futures price of US $309.88/short ton +/- local basis MINN Wheat - 50% of 2018/19 crop sold when hanging orders triggered at avg price of US $8.315/cwt futures CBOT & KC Wheat- 50% of 2018/19 crop sold when hanging orders triggered at avg price of US $5.35/cwt futures Live Cattle - 20% sold thru end of Feb at an avg price of US $116.80/cwt futures (80% packer/20% sold futures or put options) 0% sold beyond end of Feb Feeder Cattle - 25% sold thru end of March 2018 at an avg price of US $46.00/cwt futures (80% packer/20% sold futures or put options) 0% sold beyond end of March Hogs - 20% sold thru mid-feb at an avg price of US $69.00/cwt futures (80% packer/20% sold futures or put options) 0% sold beyond mid-feb Corn Feed - 100% booked/purchased thru end of Sept at an avg futures price of US $3.72/bu +/- local basis Soybean Meal - 100% booked/purchased thru end of Sept at an avg futures price of US $321.27/short ton +/- local ba. Closing Market Quotes for Commodity High Low Close Change CORN $3.685 $3.665 $ $0.002 OATS $2.685 $2.650 $ $0.007 SOYBEANS $ $ $ $0.027 COTTON $75.87 $75.13 $75.72 $0.31 SOYBEAN MEAL $ $ $ $0.40

14 SOYBEAN OIL $31.84 $31.48 $ $0.16 CANOLA $504.5 $500.5 $503.1 $1.90 CHICAGO WHEAT $4.645 $4.567 $ $0.040 KANSAS CITY WHEAT MINNEAPOLIS WHEAT $4.822 $4.730 $4.785 $0.005 $6.077 $6.030 $ $0.030 CME LEAN HOGS $ $ $ $1.575 LIVE CATTLE $ $ $ $0.400 FEEDER CATTLE $ $ $ $0.100 (DJIA) DOW JONES INDUSTRIAL AVERAGE $25,424 $25,113 $25,235 $1 CRUDE OIL $61.99 $60.88 $61.60 $0.26 NATURAL GAS $2.589 $2.539 $ $0.022 ETHANOL $1.491 $1.479 $ $0.003 GOLD $1,364.4 $1,347.3 $1, $4.9 U.S. $ INDEX $ $ $ $0.525 CDN $ $ $ $ $ EURO $ $ $ $ $ Source: For mobile quotes download new free Farms.com Markets app from To view long-version click here: report IN OTHER NEWS OUTSIDE MARKETS Crude oil firmer at $61.60 up +$0.26. Gold lower $1,350.4 off -$4.9. Cattle mixed & hogs lower. U.S. $ Index at $89.03 up but worst week in 9 years (surging inflation will

15 save the U.S. $ as the U.S. Fed ramps up rate hikes), Brazilian Real higher, Euro and CDN $ lower. World Stocks: Japan up +1.1%, Europe up +0.9%, Dow Futures up +1 point. Dalian Exchange: closed for the Chinese Lunar New Year. Malaysian Palm Oil up +0.2%. EU milling wheat is trading weaker, while corn is trading higher. GRAINS Grain markets tradied slightly lower ahead of a long weather weekend. The soybean meal and soybean markets are both trading to new contract highs but the close is more important we will see if the gains hold. The Chinese Lunar New Year starts today the year of the dog, a day on which crying children, washing clothes, using scissors should apparently be steered clear of to avoid bad luck but not sure the soybean markets will miss them much. Markets are closed Monday for Family Day in Canada and Presidents Day in the U.S. so we could potentially have a volatile trade on Monday night pending problems out of South America weather? USDA reported private sale of 116,000 MT of corn sold to South Korea for the 17/18 and 28,000 MT of soy oil sold to South Korea for the 17/18. Next Thursday and Friday is the USDA outlook conference in which we will get an indication on upcoming 2018 acreage intentions. (USDA in Nov was projecting 91 million acres in corn, 45 all wheat and 91 soybeans. Private analysts have started to lower corn acres and raise soybean acres thanks to the rise in soybeans futures near contract highs. (Please see chart below) The Buenos Aires Grain Exchange left its soybean crop forecast at 50 MMT (vs 58 LY) and corn at 39 MMT (vs 41 LY). The exchange said that 56% of the soybean crop and 58% of the corn crop has been damaged by drought. In their weekly report they said rainfall in various regions around the country varied widely, but were insufficient to recompose the overall water deficit. To date, more than 13,000,000 hectares planted with soy, corn and sunflower crops maintain a moisture condition between regular and poor. They noted early planted corn in the center of the national agricultural area have

16 yields that are currently below the zonal average. Regarding the late planted corn, the lack of precipitation has affected the normal growth and development of the grain over the provinces of Buenos Aires, Cordoba, Santa Fe and Entrecote. The corn yield potential could be affected if new rainfall does not accumulate over the next few weeks. CORN Brazil's Agriculture Minister, Blairo Maggi, suggested this season's grain crops will be good and production volumes could exceed last season's output if weather cooperates with second season corn crop. SOYBEANS Weather for Argentina remains stressful for near term crop development potential. Erratic rainfall will not likely bring serious changes in the stress that many crops are enduring right now. However, World Weather, Inc. believes the many showers expected over the next 10 days will add moisture to the atmosphere over Argentina raising the potential for a greater rain event the next time a significant cool pool of air moves over the region. Their Trend Model has been suggesting a change will occur in March that will bring greater rainfall to the nation. However, much of the damage will have been done by that time (a little too late) and only late season crops will likely experience improving conditions.us January 2018 NOPA Soybean Crush: million bushels; expected mln bu.; prior month mln bu but was still the highest ever total for the month and the eighth highest on record for any month. Soyoil Stocks: billion lbs; expected 1.60 bln lbs; prior month billion lbs. Soymeal Exports: 860,416 tons vs the prior month 921,726 tons. CANOLA Many Manitoba yield records were broken in 2017, despite a drier-than-normal growing season. Canola averaged 47 bushels an acre across Manitoba, 13% more than the previous record set in WHEAT NOAA s long-range U.S. weather forecasts point to relatively dry conditions continuing in the U.S. southern Plains into May. NOAA s peek at the June-through- August timeframe points to the risk of dryness continuing west of the Mississippi River. U.S. HRW wheat country is still very dry. Conditions across the HRW wheat belt will take on more significance over the coming four to six weeks as wheat comes out of dormancy and temperatures warm up. Informa updated their 2018 U.S. winter wheat production and yield estimates this morning. They lowered their 2018 U.S. winter wheat production estimates from last month by 61 mil bu down to bil bu. They pegged the 2018 winter wheat yield at a 47.7 bpa vs 49.3 bpa previously. They left 2018 all-wheat planting intentions unchanged at mil acres, of which winter wheat acres were mil, Spring wheat other than durum acres were mil and durum acres were mil.

17 LIVESTOCK LEAN HOGS With the stiff discount of April futures to the cash market and the oversold technical setup, the market may be in a position to see a further recovery bounce just ahead. Pork export sales of 21,258 MT during the week of Feb. 8 were 67.8 percent larger than the week previous and percent above the same week in The U.S. pork carcass cutout was higher by +$0.35/cwt, at $77.34/cwt, as of close today. Bellies were higher +$1.63 to $ The CME Cash Hog Index closed lower at $74.01/cwt, off -$0.29wt, for CATTLE The short-term trend is up and strong demand factors but beef export are lagging last year s pace up 19% vs 22% last year. Talk of strong consumer demand helped support cattle futures this week as it may result in higher cash markets. Boxed beef cutout values were: choice beef at $209.88, up +$0.84, and select at $205.12, off -$0.02, as of close on The CME Feeder Cash Index closed higher at $147.7/cwt, up +$0.08/cwt, for WEATHER Argentina s crop stress during the next 2 weeks will be greatest from the southeastern corner of Santiago del Estero through northern Entre Rios and southern Corrientes where the soil has already been depleted of moisture and little rain is expected. Coverage of significant rain should not be widespread and most areas should see only temporary improvements in conditions for crops in the next 2 weeks. This newsletter is for informational purposes only. The statements contained herein are based on material believed to be reliable, but are not guaranteed to be accurate or complete. The opinions and comments expressed in this newsletter represent the opinions of the commentators-- they do not necessarily reflect the opinion of Farms.com. This newsletter is not intended to provide individual financial, tax or investment advice to anyone. Investments or trading strategies should be evaluated relative to each individual s objectives. Farms.com will not be liable for any errors or omissions in the information, or for any damages or losses in any way related to this newsletter. Neither the information, nor any opinion expressed, constitutes a solicitation of the purchase or sale of any securities, futures, or options. Futures trading involves substantial risk, may result in serious financial loss, and is not suitable for everyone. Any trading decisions that you may make are solely your responsibility. Copyright 2018 Farms.com Risk Management, Inc. All Rights Reserved.

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