Are Beans Too Bullish?

VANCOUVER - Dec 13/08 - SNS -- The most significant change in the USDA's latest crop production and supply and demand forecasts for the United States was a reduction in the quantity of corn it expects to be used to make ethanol in 2008-09.

"Ethanol use is projected 300 million bushels lower this month," said the USDA's World Agricultural Outlook Board, "as prospects for blending above federally mandated levels decline. Financial problems for ethanol producers are reducing plant capacity utilization for existing plants and delaying plant openings for those facilities still under construction. Falling gasoline prices have also resulted in high relative prices for ethanol, reducing blender incentives."

The net result is the USDA expects corn stocks in the United States to end up 350 million bushels higher than initially expected at a forecast 1,474 million, down from this summer's 1,624 million carry in. If ethanol demand does not improve, the United States may not need to increase corn area four or five million acres in 2009. In fact, it could be argued that the amount of land expected to shift out of soybeans in 2009 might be enough to cover the needed increase in corn if average yields stay above 150 bushels per acre.

One reason ethanol use is expected to decline is that its price is no longer competitive with gasoline. In July and August, the January ethanol futures contract averaged 77% of the value of the January gasoline futures contract. In November it averaged 133% and so far this month it has averaged 151% of the price of gasoline. While U.S. government mandates require that a certain percentage of ethanol be blended with gasoline, the higher the price of ethanol, the greater the incentive to circumvent the mandates. Additionally, there has been a fundamental decline in gasoline consumption rates in the United States as part of an increasingly successful effort by ordinary consumers to reduce spending to help reduce personal debt.

Corn prices reflect the change in outlook, with the nearby March contract down the levels it was trading at this time last year. One year ago, it was worth $4.382 per bushel. Today it is down almost 20% at $3.52 per bushel. The nearby March soybean contract is down more sharply, having fallen 38.5% from this time last year to $8.40 per bushel.