“CORN BASED” Ethanol, part II the dominoes begin to fall!
Commodities / Ethanol May 11, 2007 - 12:47 PMBy: Ty_Andros
Eight to 12 weeks ago I penned a piece on CORN BASED ethanol in the “Fingers of Instability” series, it is a careful overview of the industry and its potential benefits (NONE) and pitfalls (you can access it at TedBits March 14, 2007 I strongly recommend you read it before beginning this commentary, it is time well spent), now in part two we take a look at the burgeoning problems we outlined in that piece. It is a disaster, written larger and larger like a boulder hitting water the waves emanating outward are killer waves to so much more. It is like a game of dominoes where once set in motion it is difficult to race ahead of the chain reactions to avoid further downfalls.
El Ninja, has emerged off the coast of South America . What does this mean? It means a wet spring and hot summer if history is correct. The wet spring has become a reality , we will see about the hot summer part of the forcast. Having grown up in the corn belt of Lincoln , Nebraska I understand corn fairly well. I still remember some of my earliest summer employment De tasseling corn. It was grueling work in the hottest part of the summer, but as a young boy I was very strong and it was always wonderful to finish the work and emerge with a POCKETFUL of cash. It was great money for me at the time.
But farmers will tell you that if the crop is not substantially in the ground by the end of the first week in May 8-12 th , it is probably time to switch your planting intentions to Soy beans or other more hardy crops that can meet the expected weather. The odds of avoiding a freeze, or having good weather during the pollination process when the crop gets MADE start working against you. Make no mistake Farmers are gamblers in that all crops are a gamble till they are taken out of the field during harvest. Drought, hail, windstorms, floods: all are challenges farmers face every year. This winter's wheat crop was set to be record large till early April when a late freeze hit the crop, decimating the expected harvest by 30 to 40%. Mother Nature threw the dice and the American wheat farmer was hit hard!
With the rapid expansion of ethanol production rapidly depleting inventories corn prices have soared to over $4.00 a bushel, old crop and NEW CROP ( new crop prices are always been much much lower than old crop as long as I can remember. It stands to reason that once the crop arrives, supplies become plentiful once again so prices drop). I have watched corn prices almost every year drop to approximately $2.00 or slightly lower. These prices have created intentions to increase corn production by over 15% to over 90 million acres, to meet the requirements of the food industry and energy producers. Soo far so good.
Too many fund investors where on board the anticipated move higher in corn and a washout occurred, taking them off the train, probably only temporarily.
But Murphy's Law is raising its ugly head “What can go wrong will go wrong” and the laws of unintended consequences (unintended don't mean unanticipated these are easily recognized opportunities) is about to explode in our faces. Corn planting has been delayed by cold and very wet weather. They haven't been able to get into the fields as they have been full of mud. Ever tried to get a Tractor or planting machine out of the mud? It is HELLL! So, planting of the intended corn crop is not in the ground is over 50% behind schedule at this late date.
Because of crop insurance that set at high prices many farmers will plant the corn regardless of when it gets into the ground, they are guaranteed their price by the government. But other farmers didn't put their acres into the program. So their planting intentions are already rotating to other grains, they will continue to do so for the next three weeks. From here on in any corn planted has diminished expectations. In three weeks don't even consider it. It is a disaster even today, set to grow to gargantuan proportions over the coming weeks and months. There is no way they can reach the intended acreage from here! Corn this week has been plummeting in price in anticipation of planting getting back on schedule, well as we go to press, huge rain storms have hit Iowa , Missouri and Kansas , 4 to 8 inches of rain and flash floods are being reported. Whoop's El ninja strikes again. Subsoil moisture is outstanding so the crop should start well unless flooding takes place.
Even if they get it in the ground, the anticipated heat will kill the yield, if el ninja produces its usual summer intense heat. Corn is a crop that needs regular rain, weather patterns provide regular anxiety year in and year out as farmers scour the weather map for this vital ingredient. Intense heat over 80 degrees for extended period is also very counter productive, the corn crop need regular temperature drops onto the high 50 to low 60's at night for optimal development. During El ninja you can expect neither, brutal heat day and night combined with far less rain.
But there is now a new problem to add to the equation. Ethanol production is mandated to increase, it is written into the law. The plants are open and new ones are being completed on a weekly basis. Current ethanol demand has completely depleted current inventories and reserves. The USDA barely talks of this ethanol demand, it is potentially explosive news, panic could easily enter the marketplace. It is the one problem that the liars at the USDA can't manage with their usual rhetoric. I have read Bill Gary's excellent work since the mid 1990's, he always publishes his estimates and the official USDA numbers. The USDA regularly rigs the game by releasing numbers that send the grain markets to the lowest price possible, just as the commerce department shades the GDP numbers, the labor department shades the unemployment data, and the treasury manipulates the inflation numbers. It is a predictable pattern used to manipulate the public and manage expectations, they are masters of this game. Some of their lies are unknowable, and we will never discover them, they are buried in the numbers they massage.
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Well the numbers are really becoming quite clear as it relates to corn. THEY ARE VERY UGLY. There is no room for a poor crop, but we are already at a poor crop because of the late planting. People and livestock require food. The crop is not going to be the size that was intended or required to meet all these demands of the competing groups of consumers: people, livestock and ethanol. Corn stocks in China , Mexico , the former Soviet Union , the EU and India are low as well. Food protests are emerging in many of these places. World corn consumption has exceeded production for 7 out of the last 8 years.
Well, domestic and international wheat stocks are also very low. Droughts throughout the world last year severely reduced wheat stocks and prompting export restrictions in many exporting countries, Australia , a major exporting nation suffered an almost complete wheat crop failure, production plunged from 25 million bushels to about 10 million. So major consuming regions went to higher priced producers to supplement their food and feed requirements. Reducing inventories around the world even more. Six out of the last seven years the world has consumed more wheat than it produced. Ending world stocks of wheat this year will be the lowest in 26 years.
As mentioned above the US wheat crop has been severely reduced by the late freeze. Can you guess who is having problems for the 2 nd straight year? Yep, you got it Australia is again in trouble. So switching to wheat as feed grain is problematic at best, additionally wheat doesn't really fatten livestock like corn does. So you need to feed more of it to get the same weight. Chickens can eat a lot of soy meal, but cows and pigs can't. It causes the runs, especially in the piggy's.
As incomes rise around the world demand for grains and meats will drive usage incrementally higher as they use rising incomes to feed themselves better. Incomes are rising around the world as 3 billion people enter the global economy after years in poverty. They wish to feed themselves in a better manner, and are doing so daily.
We are in the beginning stages of a massive bull market in grains. Historic, shortages in beans and wheat which should emerge with next years crop, and are close on the heels of the present and emerging corn shortage. The full impact of bio-fuels has still not been felt, as worldwide new plants come on line over the next year, they will be. See how soy and palm oil are beginning to move? Add to this situation the tremendous liquidity now searching for alpha in the hedge and commodity investment funds “fire hoses of hot money” and this really is shaping up to be quite a fireworks show. At one point earlier this year the corn crops open interest at the Chicago board of trade was double what could be harvested. WOW. The dominoes of disaster roll forward as CORN BASED ethanol's unintended consequences (unintended does not mean unanticipated, these are big investment opportunities). This is an asset class that has “Finger of Instability” (see Tedbits archives for the series at www.TraderView.com ), written all over it. It can and will get way ahead of itself before the bubble pops.
The definition of inflation is when you purchase something today because you know it will be higher in price tomorrow. We are going to see this written in real life as the consumers and industrial users of this essential commodity we call corn duke it out, with the speculators in there to make their lives even more miserable through higher prices. The stupid, politically inspired American experiment in “CORN BASED” ethanol is about to roll over you like a steamroller!!! What a wonderful addition to add to our lives! NOT. Do you know what to do? Do you know who to thank for this wonderful opportunity?
Thank you for reading Tedbits...
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By Ty Andros
Tedbits is authored by Theodore "Ty" Andros , and is registered with TraderView, a registered CTA (Commodity Trading Advisor) and Global Asset Advisors (Introducing Broker). TraderView is a managed futures and alternative investment boutique. Mr. Andros began his commodity career in the early 1980's and became a managed futures specialist beginning in 1985. Mr. Andros duties include marketing, sales, and portfolio selection and monitoring, customer relations and all aspects required in building a successful managed futures and alternative investment brokerage service. Mr. Andros attended the University of San Di ego , and the University of Miami , majoring in Marketing, Economics and Business Administration. He began his career as a broker in 1983, and has worked his way to the creation of TraderView. Mr. Andros is active in Economic analysis and brings this information and analysis to his clients on a regular basis, creating investment portfolios designed to capture these unfolding opportunities as the emerge. Ty prides himself on his personal preparation for the markets as they unfold and his ability to take this information and build professionally managed portfolios. Developing a loyal clientele.
Disclaimer - This report may include information obtained from sources believed to be reliable and accurate as of the date of this publication, but no independent verification has been made to ensure its accuracy or completeness. Opinions expressed are subject to change without notice. This report is not a request to engage in any transaction involving the purchase or sale of futures contracts or options on futures. There is a substantial risk of loss associated with trading futures, foreign exchange, and options on futures. This letter is not intended as investment advice, and its use in any respect is entirely the responsibility of the user. Past performance is never a guarantee of future results.
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