Caution Signs in Feedstock Costs for Biofuels
AgMRC Renewable Fuels Monthly Report
Dr. Robert Wisner, University Professor Emeritus and Biofuels Economist,
Iowa State University
The largest costs of producing biofuels by far are the costs of the feedstocks. Corn cost currently accounts for about three-fourths of the variable cost and two-thirds of the total cost of producing ethanol. Where soybean oil is the feedstock for biodiesel, it accounts for about 85% of the variable cost and 78% of the total cost of production (i). For that reason, changes in corn and soybean market conditions can have a major impact on biofuels net returns.
So far this year, official projections have indicated the U.S. corn and soybean yields will be slightly above long-run trends and feedstock costs will remain low in the year ahead (ii). However, weather developments so far this growing season create substantial uncertainty of whether those projections will materialize. A large portion of the Midwest Grain Belt has been saturated by almost continuous very heavy rainfall until mid-July. Farmers normally welcome timely rains, but for large areas the pattern this year has delayed planting the last part of the soybean crop and caused stunted or drowned out crops in sizable parts of fields, delayed or prevented weed control, and resulted in loss of nitrogen fertilizer needed for good yields. Wet weather has also increased the risk of various crop diseases. Northwestern parts of the Belt have avoided the extreme rains. Yields there will at least partially offset problems further east and south.
Uncertainty about U.S. average corn and soybean yields and production potential will remain large until at least the USDA September 11 Crop Production report. The August 12 USDA crop forecasts will be important market indicators but will still leave considerable uncertainty about crop sizes. From now through early September, weekly crop progress and condition reports from USDA and uncertainty about the total acreage to be harvested may create periods of upward feedstock price risk for biofuels producers. This situation creates risk that ethanol producer margins may tighten in the months ahead. Feedstock costs for biodiesel producers will be tempered by large South American soybean supplies from harvests earlier this year, but could face some upside risk if the proposed increases in U.S. biodiesel blending mandates are implemented.
In this article, we review crop conditions by state in late July and compare them with last year. We also compare them with 2013, a previous year of abnormally heavy rainfall in parts of the Corn-Soybean Belt. The 2013 U.S. average corn yield was 158.1 bushels per acre (iii). As shown in Figure 1, that was far from being a disaster yield. However, with this year’s USDA’s estimate of harvested acres, the 158.1 bu yield would produce 800 million bushels less than the production indicated by USDA’s July 10 projection of 166.8 bushels per acre and 1.4 billion bushels less than last year (iv). The red box shows USDA’s latest 2015 yield projection, which has not changed since February. Widespread excessive rains also hint that harvested acres may be slightly less than indicated in the USDA July 10 report.
Figure 2 below shows June 2015 rainfall as percentages of normal. Dark blue areas received 200 to 300 percent of normal rainfall. The various shades of pink received 300 to 600 percent of normal or more. Lighter blue areas received 150 to 200 percent of normal.
As the map shows, these areas covered the entire eastern Corn Belt, Missouri, southern and parts of eastern and central Iowa, northeastern Kansas and southeastern Nebraska, as well as some parts of the Dakotas. Precipitation in areas with various shades of yellow ranged from 75 to 100 percent of normal. May 2015 precipitation was modestly above normal, but by a much lower percentage and over a much smaller area.
Figure 3 provides a contrast of this year’s rainfall with June 2013. In 2013, the heavy rainfall was in May and the extreme 200 to 300 percent of normal rainfall was over a smaller area. The excessive rain occurred from the Dakotas, eastern Nebraska, Iowa, and extreme southeastern Minnesota to central Illinois. The rains delayed plantings and caused abnormally large drowned out areas. However, much lighter June rainfall allowed crops to partially recover in June. June weather is believed to have an important influence on ear size and also influences survivability productivity of corn in abnormally large standing water or saturated soils in low areas of fields. National Oceanic and Atmospheric Administration predicted on July 22 that heavy rainfall will return to parts of the Corn and Soybean Belt through the end of July (5), with parts of central Iowa and northwest Minnesota receiving up to 2.5 to 5.0 inches of rain. Substantial rain also is forecast for west central Illinois and parts of southern Missouri. Crops will benefit from the expected late July rains, except for areas receiving the heaviest rainfall which may damage soybeans in low-lying areas.
Crop Conditions, July 20, 2015
The areas most severely impacted by this year’s excessive rains are Missouri, Illinois, southern Iowa, Indiana, Ohio, parts of Michigan, northeastern Kansas, and southeastern Nebraska. Corn planting progress in parts of these states was slightly delayed from normal in April, but by mid-May was ahead of the longer-term average, as shown in Figure 4. As the chart indicates, some other years have had much earlier plantings, but plantings this year were not delayed enough to cause concerns about reduced yields. They were considerably earlier than in 2013, when excess rains delayed western Corn Belt plantings. The problem this year for many areas has been extreme rains after the corn crop was planted. In contrast to corn planting, the last part of the soybean crop was delayed in parts of the areas experiencing extreme rains. About 3 to 4 million acres of soybeans remained to be planted at the end of June. In early July, soils remained saturated in the most severely affected areas and raised the question whether planted and harvested soybean acreage estimates may be reduced from those in the June 30 NASS, USDA Planted Acreage report. USDA will re-survey farmers’ soybean acreage in three states for its August 12 crop forecast.
The table below shows corn percentages in various conditions in major producing states on July 19 of this year and comparisons with July 20 last year and July 22, 2013. Iowa is the top corn producing state, followed in rank by Illinois, Nebraska, Minnesota, and Indiana. Crop conditions in Iowa and Minnesota on July 19, 2015 were much better than in late July 2013 and better than last year, while crop ratings in Illinois, Indiana, North Carolina, and Ohio were much worse than both years. North Dakota, Colorado, Wisconsin, and Texas are indicated to be in considerably better condition this year than in 2013. Conditions in South Dakota were similar to late July 2013.
On July 22, 2013, 63% of the major-states corn crop was rated in good to excellent condition, compared with 69 percent on July 19 this year. Figure 5 shows the changes in good-to-excellent ratings in these states in the weeks of July 12 and 19, 2015. Ratings in Illinois and Indiana declined in both weeks. As the chart indicates, several states showed increases in the ratings in one or both of the weeks. The largest change was in Ohio, where the good-to-excellent rating declined by 4 percentage points in the first week and increased by 5 percentage points in the second week. Weekly good to excellent percentages for 2013, 2014, and so far in 2015 are shown in Figure 6. Last year, the good-to-excellent percentages remained in a narrow range for the growing season, declining slightly in late July and August but moving up slightly in September. During 2013, impacts from the wet spring began to be more obvious as the season progressed and led to a downward trend in ratings. This year, crop ratings started out near last year but by late June were only marginally above those of 2013.
While our main focus has been on corn crop conditions, soybeans face similar issues and greater acreage uncertainty than corn. USDA’s August 12 Crop Production report may be a significant turning point in grain prices. It will provide the first field-based indication of this year’s crop and soybean yields as well as updated estimates of acreage to be harvested. The August corn yield will be based on a large-scale farmer sample in late July and the first few days of August, and data from scientifically selected samples in farm fields in major producing states. The field data will provide estimates of ears per acre and are expected to be combined with average ear weights of recent years to estimate yields. Soybean yields will be estimated from the farmer survey and field samples that will give an initial indication of numbers of plants and, in some cases, pods per acre and seeds per pod. However, at the time of the survey, many fields were not far enough advanced in pod setting to give an accurate count. Pod counts could increase some in later crop surveys. Bean size also will be a key variable in determining yields, but will remain uncertain until at least mid to late September.
These estimates will be updated in the September, October, November, and January crop reports and will provide increasing accuracy with each successive report. Indications at this writing hint that U.S. corn and soybean yields may be less than previously expected. Widely varying conditions by state indicate that corn basis patterns will likely be stronger in states east of the Mississippi river than further west. That may create a slight disadvantage for ethanol producers in the eastern Corn Belt and Missouri versus further west and northwest. AgMRC balance sheets provide a tentative indication of corn, soybean, DDGS, soybean oil supply and demand balances, and potential prices with alternative U.S. average corn and soybean yields. They are available at Corn; DDGS, Soybeans & Soybean Oil-biodiesel.
September 30 Grain Stocks Report and Last Year’s Soybean Crop
Along with 2015 production uncertainty, there is considerable uncertainty about the amount of corn being fed this summer and the size of the 2014 soybean crop. USDA’s National Agriculture Statistics Service September 30 Grain Stocks report will allow analysts to update summer quarter feed and residual use. Soybean “residual” disappearance has been very large this year, implying that last year’s soybean crop (and possibly its average yield) have been over-estimated. “Residual” use is the disappearance that cannot be explained by domestic crushings, seed use, and exports (vi). If the crop has been over-estimated, a downward revision would be expected with the release of the Grain Stocks report.
i Based on the AgMRC ethanol and biodiesel models, which can be accessed at these sites and here.
ii World Agricultural Outlook Board, July World Agricultural Supply Demand Estimates, WASDE-543, July 10, 2015.
iii National Agricultural Statistics Service, U.S. Department of Agriculture, Crop Production 2014 Annual Summary, January 12, 2015.
iv World Agricultural Outlook Board, July World Agricultural Supply Demand Estimates,Op.Cit.
vi For more detain on this marketing year’s soybean residual use and implications, see Scott Irwin and Darrel Good, “Large Seed and Residual Use of Soybeans and Prospects for Year-Ending Stocks” FarmDoc Daily, Department of Agricultural and Consumer Economics, University of Illinois-Urbana, July 15, 2015.