Grain Availability for Biofuels: Has the Picture Changed in the Last Year?
AgMRC Renewable Energy Newsletter
January 2010
Robert Wisner
Professor of Economics and Energy Economist
Ag Marketing Resources Center
Iowa State University
rwwisner@iastate.edu
As the new year begins, it may be useful to look back briefly at the biofuels industry and availability of grain supplies in late 2008, to see how conditions have changed. For the future, one of the key issues will be the adequacy of corn and soybean supplies to provide raw material for growth of biofuels production. Preliminary estimates of 2009 U.S. crops and early projections of South American production for its March through late April 2010 harvest show adequate but modestly tightening corn supplies. Supplies of soybeans and vegetable oils for biodiesel are tight this winter, but if current South American crop projections materialize, supplies will be much more ample by late spring.
A year ago, the ethanol industry was in a severe financial crisis, with many firms either in bankruptcy or rapidly approaching it. Oil, gasoline, and ethanol prices had collapsed after rising sharply in the previous several years and reaching an all-time record high in early summer 2008. Demand for gasoline had weakened slightly, thus slightly slowing but not halting the growth in ethanol demand. Fears of an impending blending wall were widespread in the industry. The projected U.S. corn supply-demand balance showed a potential for modestly reduced carryover stocks by the end of summer in 2009, with a likely need for additional corn acres to meet 2009-10 marketing year demand.
Like ethanol, the biodiesel industry was struggling with a very negative economic environment. A high percentage of biodiesel plants were either idled or operating at well below their potential. A number of biodiesel producers were facing bankruptcy and the industry was operating far below its maximum capacity. For soybeans, supply-demand projections also pointed to tightening supplies by the end of the next summer.
Specific supply-demand projections in late 2008
Table 1 shows our projections of corn supplies, use for ethanol, other domestic demand, exports, ending carryover stocks and the season average U.S. corn price in December 2008 and December 2009 weighted by the volume of farmer marketings. Supply projections for both years were based on USDA’s November crop report. The 2009 crop acreage and yield estimates are subject to possible revisions in USDA’s January 12 season final crop report.
Before and during the growing season, we typically show three alternative weather and yield scenarios to provide a sensitivity analysis, with historical probabilities to show approximately how frequently we would expect those scenarios to occur. Table 1 projections show our medium or normal-yield scenarios for 2010-11.(1) Also shown in table 1 are the preliminary data for 2008-09 that actually resulted, based on the latest numbers available from USDA. These data could possibly be revised slightly in the future, but any revisions should be minor.
Our early and very tentative projections for the 2009-10 supply-demand balance a year ago and in December 2009 are included in Table 1. For the 2008-09 marketing year that ended on August 31 of this year, corn processed for ethanol was 0.6% less than we projected a year ago. Other processing, which included wet milling for corn oil, high fructose corn sweeteners, starch and other products, was 4.8% less than we expected in December 2008. Exports were 5.7% stronger than we projected, due in large part to the severe drought and sharp drop in the South American corn harvest last spring. Domestic corn feeding also was a little lower than we anticipated, partly reflecting the severe cost-price squeeze in the livestock sector.
| Table 1. December 2008 and December 2009 AgMRC Projections of U.S. Corn Supply-Demand Balance | ||||||
|---|---|---|---|---|---|---|
| Dec. 08 | Actual for | Projections for 2009-10 | Projections for 2010-11 | |||
| Proj. 08-09 | 2008-2009 | Dec. 2008 | Dec. 2009 | Dec. 2008 | Dec. 2009 | |
| Harvested Mil. Acres | 78.2 | 78.6 | 80.0 | 79.3 | 83.0 | 81.5 |
| Bu./A. | 153.8 | 153.9 | 157.5 | 162.9 | 159.0 | 159.0 |
| Production, Mil. Bu. | 12,020 | 12,101 | 12,600 | 12,921 | 13,197 | 12,959 |
| Total Supply, Mil. Bu. | 13,660 | 13,739 | 14,085 | 14,605 | 14,327 | 14,395 |
| Utilization & Stocks, Mil. Bu. | ||||||
| Feed & Residual | 5,400 | 5,254 | 5,400 | 5,500 | 5,400 | 5,300 |
| Ethanol | 3,700 | 3,677 | 4,350 | 4,275 | 4,600 | 4,650 |
| Other Processing | 1,340 | 1,276 | 1,345 | 1,280 | 1,345 | 1,280 |
| Exports | 1,750 | 1,858 | 1,875 | 2,125 | 1,900 | 1,925 |
| Total Use | 12,190 | 12,065 | 12,970 | 13,180 | 13,245 | 13,155 |
| Carryover | 1,470 | 1,674 | 1,115 | 1,425 | 1,082 | 1,240 |
| Carryover, Weeks' Supply | 6.3 | 7.2 | 4.5 | 5.6 | 4.2 | 4.9 |
| Mktg. Yr. U.S. Avg. Price/Bu. | $3.60 | $4.06 | $3.85 | $3.60 | $3.85 | $3.75 |
Ending August 31, 2009 carryover stocks and season average prices -- Ending carryover stocks were about six days of usage larger than we projected in December of last year. The major deviation from our projections was that the season average price was $0.46 per bushel higher than we expected a year ago. Factors contributing to the higher price included the short crop in South America, the weakening U.S. dollar, and re-entry of commodity fund traders into the market, as well as a slightly quicker recovery in petroleum prices than we anticipated. Also, the season average price reflects more forward contracting by farmers at the high prices of the summer of 2008 than we anticipated.
2009-10 and 2010-11 projections
In our early projections for 2009-10 a year ago, we anticipated that corn harvested acreage for this year would be around 80 million acres, up almost 1.5 million acres from the previous year. The preliminary estimate from USDA, which is subject to revision on January 12, is 0.7 million acres lower than we expected. Delayed plantings in the eastern Corn Belt were a factor, along with high fertilizer prices. The current estimate of the U.S. average yield, also subject to revision, is 5.4 bushels per acre higher than our medium or normal yield projection a year ago and is moderately above the 2000-2008 trend line. We currently project corn use for ethanol to be slightly lower than anticipated at this time last year, but corn exports are expected to be substantially higher because of the short crop in South America. Our projected feed and residual use is slightly higher than indicated in December of last year due to moderately lower U.S. grain sorghum production and feed availability, the lower quality of this year’s corn crop, which is expected to result in less pounds of meat, milk, and eggs per pound of grain fed, and possible heavier than normal residual disappearance due to field losses from delayed harvesting and spoilage of some corn stored at too high moisture content. With USDA’s most recent yield estimate, our latest projections of ending carryover stocks for next August 31 are approximately eight days larger than we anticipated last year at this time. Thus, the availability of corn for biofuel production is changed only very slightly from what we anticipated in our medium or normal-yield scenario in December 2008.
A year ago, we anticipated a need for about 83 million acres of corn to be harvested for grain in 2010 to meet market demand. Because of the higher than anticipated 2009 yield, our projections now indicate a slightly smaller increase will be needed in 2010. Our corn processing for ethanol projections for 2010-11 are marginally higher than indicated a year ago, due to a quicker recovery of the industry from its financial crisis and slightly stronger petroleum and gasoline prices than we anticipated 12 months ago. With the normal-yield scenario, our projected ending corn carryover stocks for August 31, 2011 are about 5 days of usage larger than we projected in December 2008.
Corn supply-demand conclusions
To summarize the corn supply-demand balance and availability of corn for biofuels, the overall picture has changed very little from a year ago, although some individual components have changed modestly. Use of corn for ethanol has not changed much from December 2008 indications. However, the most significant changes were in exports, due to the severe South American drought and reduced production there and the above-trend U.S. corn yield in response to a cooler and wetter than normal growing season. A year ago, adequate but not excessive corn supplies were anticipated, with gradually tightening supplies in the next two years. Carryover stocks were expected to remain just above normal pipeline or working stocks levels. Normal working stocks are about a four weeks’ supply at the end of August. That’s just enough supply to maintain normal feeding, processing, and exporting activities until new-crop supplies are readily available.
For 2009-10, the current corn crop estimate points to adequate corn supplies for feed, food, fuel, and export uses. Carryover stocks on August 31 of next year are expected to be about 1 and one-half weeks above minimum working stocks levels. Our early and very tentative normal-yield projections for 2010-11 show corn carryover stocks declining slightly by August 31, 2011 but still remaining marginally above minimum working stocks levels.
A note on potential price volatility
In looking at adequacy of corn supplies, it is important to note that indicated stocks leave very little reserve supply to help carry corn users through tight supplies that would result in cases of severely adverse weather such as a major Corn Belt drought or excessive flooding at a key time in the planting or growing season. That fact will create continued large potential volatility in prices if any hint of serious weather problems should occur. Conversely, a sharply above-trend U.S. corn yield could put significant downward pressure on prices for an extended period. For example, a 12-percent above trend yield with our tentatively projected 2010 harvested acreage would produce an additional 1.56 billion bushels of corn. If most of this went into carryover stocks, the carryover would rise to about an 11 weeks or nearly three-months’ supply. A reserve supply of that size would make prices less sensitive to weather threats and likely would temper the aggressiveness of users in purchasing corn.
Soybean and soybean oil availability for biofuels now vs. a year ago
While the corn supply-demand picture is adequate, the picture is considerably different for soybeans, with prospects for gradually tightening supplies for the next two years (an outlook very similar to last year). For soybeans, supply-demand prospects last year and again this year show prospects for gradually increasing adequacy of supplies in the next two years, provided U.S. and South American yields are near normal. However, U.S. supplies will remain tight until new-crop South American beans are available next spring. Last year’s projected carryover stocks two years out with normal yields and this year’s projections, as indicated in Table 2, show carryover stocks moving significantly above the very low August 31, 2009 level. Even so, stocks are expected to be only very slightly above minimum working stocks needs of about 3.5 weeks’ supply next summer, with a modest increase in 2011.
The most significant changes in the soybean supply-demand balance and soybean-soybean oil availability for biodiesel were triggered by several events in 2009 including:
- The extremely sharp decline in spring 2009 South American soybean production
- The European Union’s decision in February 2009 to place punitive taxes on its imports of U.S. biodiesel
- EPA lack of enforcement of U.S. biodiesel blending mandates prescribed in the December 2007 energy legislation
- Tentative EPA and California conclusions that because of indirect land use impacts (ILUI), soybean-based biodiesel does not meet greenhouse gas reduction goals
- Greater-than-expected competition from distillers grains and solubles (DGS) in protein feed markets in response to high soybean meal prices
- Greater use of animal fats and recycled cooking oils for biodiesel than in past years, as an alternative to soybean oil (2)
- Uncertainty about continuation of the U.S. biodiesel blending tax credits after 2009
Table 2 shows how these various developments impact the U.S. soybean supply-demand balance and use of soybean oil for biodiesel now vs. projections a year ago. The most significant changes were
- 19% larger soybean exports for 2008-09 than were anticipated in December 2008,
- 45% drop from early expectations in the amount of soybean oil used for biodiesel last season,
- 2.8% smaller domestic soybean crush for 2008-09 than anticipated, and
- Substantially higher soybean prices for both 2008-2009 and 2009-2010 than projected a year ago.
In December 2008, soybean carryover stocks for August 31, 2009 were expected to be marginally below normal working stocks, but with South America’s crop problems they became even tighter. Actual August 31 stocks, after a 46 million bushel increase in production from the November 2008 crop estimate, were less than a two and one-half weeks’ supply at the end of August. With the slowed crop maturity and a wet harvest season, tight old-crop supplies supported soybean prices in a counter-seasonal pattern throughout most of the fall.
| Table 2. December 2008 and December 2009 AgMRC Projections of U.S. Soybean Supply-Demand Balance | ||||||
|---|---|---|---|---|---|---|
| Dec. 2008 | Actual for | Projections for 2009-10 | Projections for 2010-11 | |||
| Proj. 08-09 | 2008-09 | Dec. 2008 | Dec. 2009 | Dec. 2008 | Dec. 2009 | |
| Harvested Mil. Acres | 74.4 | 74.7 | 73.2 | 76.6 | 71.2 | 75.5 |
| Bu./A. | 39.3 | 39.7 | 43.0 | 43.3 | 43.5 | 43.1 |
| Production, Mil. Bu. | 2,921 | 2,967 | 3,148 | 3,319 | 3,097 | 3,254 |
| Total Supply, Mil. Bu. | 3,133 | 3,185 | 3,335 | 3,465 | 3,413 | 3,515 |
| Utilization & Stocks, Mil. Bu. | ||||||
| Domestic Crush | 1,710 | 1,662 | 1,760 | 1,700 | 1,700 | 1,700 |
| Seed & Residual | 165 | 101 | 175 | 175 | 175 | 175 |
| Exports | 1,080 | 1,283 | 1,090 | 1,340 | 1,340 | 1,340 |
| Total Use | 2,955 | 3,047 | 3,025 | 3,215 | 3,215 | 3,215 |
| Carryover | 178 | 138 | 310 | 250 | 198 | 300 |
| Carryover, Weeks' Supply | 3.1 | 2.4 | 5.3 | 4.0 | 3.2 | 4.9 |
| SB Oil for Biodiesel, Mil. Lbs. | 3,100 | 1,700 | 3,400 | 2,200 | 3,750 | 3,550 |
| Mktg. Yr. U.S. Avg. Price/Bu. | $8.65 | $9.97 | $7.80 | $9.00 | $7.30 | $8.25 |
| SBO Avg. Price, Decatur, $/Cwt. | $33.00 | $32.16 | $35.00 | $37.00 | $34.00 | $36.00 |
EU biodiesel import restrictions
EU’s decision to penalize U.S. biodiesel imports caused a drastic reduction in the amount of soybean oil used for biodiesel. A higher percentage of EU’s automobile fleet is diesel powered than in the U.S. because of its more lenient emission standards for such vehicles, as well as its higher fuel prices and the greater efficiency of diesel engines than equivalent-power gasoline engines. Accordingly, EU has a heavily subsidized biodiesel program. Its decision to implement the punitive import taxes was due in part to negative reactions of its biodiesel industry to U.S. “splash and dash” biodiesel exports. With splash and dash, U.S. exporters were able to import large shipments of diesel fuel, add a small amount of biodiesel in splash blending, export the product to EU, and collect the U.S. blending tax credit. EU’s action eliminated a substantial market for U.S. biodiesel, thus contributing to the depressed economic environment for the U.S. industry.(3) Reduced biodiesel demand as well as strong competition from DGS in protein feed markets resulted in a slightly lower soybean crush than anticipated a year ago.
Looking ahead for the next two marketing years, changes in EU policies and uncertainty about U.S. biodiesel policies are the major reasons for our approximately 1/3 lower volume of U.S. soy-based biodiesel projected to be produced in 2009-10 than indicated a year ago. For the September 2009- August 2010 marketing year as a whole, available soybean and soybean oil supplies are not expected to be a constraint if South America has normal soybean yields in the current growing season. However, supplies currently are tight and are likely to remain that way until mid to late February 2010. Tighter supplies are holding soybean oil prices a little higher than anticipated a year ago. Ending soybean stocks next August are projected to be about one month’s supply, 1.2 weeks less than projected a year ago. For 2010-11, modestly reduced U.S. biodiesel demand vs. year-ago projections and somewhat greater protein feed competition from distillers grain than previously anticipated are indicated to leave August 31, 2011 carryover stocks (with the normal-yield scenario) slightly above indications a year ago.
Summary of soybean availability
In summary, the availability of soybeans and soybean oil for 2009-10 and 2010-11 is not indicated to be a major constraint on biodiesel production in U.S. if South American crops are near normal. Supplies for the current marketing year are a little tighter than indicated at this time last year because of extreme weather problems in South America last winter and early spring. However, U.S. and EU government policy actions that limit biodiesel demand and create uncertainty about future policies are a constraint on U.S. biodiesel production. That, in turn, makes 2010-11 soybean availability for biofuels and other uses look a little more adequate than anticipated a year ago.
South America’s corn and soybean crop situation
By far, the largest corn and soybean exportable supplies come from North and South America. South America as a whole usually is by far the largest exporter of soybeans and soybean products in the world. Brazil, Argentina, and Paraguay are its major producers. Argentina is the world’s largest exporter of soybean meal because its government export tax structure favors value-added processing over exports of raw soybeans. Since the Southern Hemisphere growing season is six-months reversed from that in the U.S., world markets for these two crops are influenced by the two different harvest seasons, the Northern Hemisphere fall in the U.S. and spring in South America. Table 3 shows changes in South America’s corn and soybean crops last spring and December 2009 projections for its spring 2010 harvests. The extreme drop in 2009 production was by far the largest in recent years and probably the largest ever recorded for that region. Dry weather was the major factor behind the decline although other contributing factors were high input costs, an adverse foreign currency exchange rate in Brazil, and a very large Argentine tax on soybean exports.
| Table 3. Changes in South American Crops in the 2009 Season and Projections for Spring 2010 | ||
|---|---|---|
| 12/10/09 USDA | ||
| Next Update: Jan. 12, 2010 | ||
| Mil. Bu. Chg. | Projected | |
| Spring '09 Vs. '08 | Change | |
| Argentina corn | -370 | +55 |
| Argentina SB | -523 | +772 |
| Brazil corn | -299 | +0.0 |
| Brazil SB | -147 | +221 |
| Paraguay SB | -110 | +103 |
| -- Total corn change | -669 | +55 |
| -- Total SB change | -780 | +1,095 |
Combined Argentine and Brazilian corn production declined from the previous year by an estimated 669 million bushels last spring.(4) These two countries are by far the largest corn export suppliers outside of the U.S. The decline in their production was equivalent to 36% of 2008-09 U.S. corn exports, and has been the primary factor in higher U.S. corn exports than expected a year ago. For the year ahead, USDA in December 2009 projected that combined corn production in these two countries in 2009-10 will increase by only 55 million bushels. Since their harvest seasons are in the spring (and in the summer for a second, smaller corn crop in Brazil), these projections indicate current tightness in U.S. and world corn supplies will be eased only slightly by the upcoming South American harvest. Keep in mind also that the most important time in South America’s growing season is January and February. By late February, a better reading on its crop prospects will be available.
Last spring’s South American soybean crop, including Paraguay, declined by an estimated 780 million bushels from the previous season.(5) This decline is equivalent to 73% of U.S. unprocessed soybean exports in the 2007-08 marketing year and 61% of U.S. soybean exports in 2009-10.
The South American crop short-falls clearly have a substantial impact on U.S. corn and soybean export demand and thus could affect availability for biofuels. However, our estimates and projections indicate they have not been a significant constraint on supplies corn and soybean oil available for biodiesel. However, their upward pressure on crop prices has tended to decrease biofuels profitability somewhat since last spring. The price impacts from smaller crops in South America are being moderated slightly by modest reductions in domestic non-biofuel consumption and reduced carryover stocks. Nevertheless, their impact has been substantial. South American crop prospects this winter and next spring will be important influences on the cost and adequacy of U.S. grain supplies for biofuels. Our projections shown in Tables 1 and 2 are on the assumption that USDA’s current projections for next spring’s South American harvests will materialize. Another important development in these countries is that both Brazil and Argentina are implementing government-mandated biodiesel blending programs. That will somewhat reduce availability of vegetable oil exports from these countries vs. what would have been available in their absence. Brazil’s major source of vegetable oils is soybeans, although other oilseed crops offer feedstock possibilities for the future. Argentina also is a significant producer of sunflowers.
References
1 For sensitivity analysis with lower and higher yields per acre, see our more detailed balance sheets.
2 See R. N. Wisner,” Keys to the U.S. Biodiesel Industry’s Future”, Biodiesel Newsletter, Jacobsen Publishing Co., October 6, 2009.
3 For more detail on these developments, see Ibid.
4 World Agriculture Outlook Board, USDA, World Grain and Oilseed Supply-Demand Projections, December 10, 2009.
5 Ibid. and Foreign Agriculture Service, World Oilseed Circular, December 2009.
