Monday, January 29, 2007

Congress' Ethanol FUBAR?

So Congress in its wisdom has put on large ethanol mandates & subsidies & protective tariffs, causing huge corn demand. Corn has run from the lower $2 level to over $4. The all-time high for corn is around $5.50 in the summer of 1996 (some cash markets hit $6). Corn stockpiles are tight as last year's crop was hurt by drought. So a BIG 2007 crop is necessary - farmers are expected to expand acreage significantly. Let's do a "gedanken" experiment. Suppose we get a cold, wet spring and planting of this big crop is delayed, or maybe even some planned acreage expansion doesn't occur. And suppose this late crop gets hit by major heat in the crucial pollination phase in late July (late crop pollination period gets pushed into late July-early August heat) and has trouble. Some good forecasters see a long, hot summer. How high can corn go? Well, $5.50 would be easy - I figure $10 might get hit. What would happen? Corn is a crucial element in the food chain affecting meat, pork, chicken, sweeteners, cereals, etc. Massive press coverage would be shrill, that's for sure. The "blame-sters" would be out in force. [I have long corn & deferred livestock futures positions I am trading around, plus DE common stock I expect to hold awhile.] [PS: Writing this column made me realize I needed a way to make more if this scenario is realized - I bought some December Corn calls way, way out of the money.]


Spin-em said...

Morning Bunkerman,

With higher corn prices,do you think farmers will be forced to plant corn instead of other crops like soy beans?.Wouldnt that push prices of soy beans up? Plus you wouldnt have to worry about the weather being too hot,cold,dry,wet,


Bunkerman said...

Hi Spin. Surveys so far show farmers are expected to plant at least 7 million acres more in corn than last year, mostly taking acreage from soybeans, but much from cotton, too. One factor is that adding that much corn affects standard crop rotation practices. Growing corn on the same field a second year requires more nitrogen fertilizer, has more risk of disease & pests, and often produces a lower yield. There is a huge carryover stockpile of soybeans & cotton, and the South American soybean crop looks OK so far - it's a big one. If I was playing soybeans, I'd play them short for summer contracts due to the carryout & South America crop competition, but am not - corn moves up tend to drag up soybeans and I'd be betting against my main line.