November 2009
Corn. Corn prices climbed in October peaking at over $4/bushel in October
breaking the $3.00-3.50/bushel range it had held since early July as concerns
that the delayed harvest and wet weather could damage the quality and yield of
the crop. Heavy rains across the corn belt has meant that only 25% of the crop
has been harvested compared to around 70% normally at this time of the year.
This will mean that this year’s harvest will be much more spread out than normal
and that farmers will have to rely on their local elevators to dry their grain. While
higher drying fees will help ADM and BG, the longer harvest will limit the basis
opportunities that they take advantage of when the crop comes in a all at once.
It is still too early to tell how much of an impact the wet weather will have
on yields. The longer harvest period is likely to keep ADM and BG’s
agricultural services segments from realizing the outsized returns they did
last year. However, this is still a huge crop, and ADM's size, scale, and
management acumen will give it an advantage over competition if volatile
conditions arise again. We will get an update on the impact on yields in the
WASDE report from the USDA next Tuesday November 10th.
Ethanol. Ethanol prices climbed in October in line with gasoline averaging
$1.90/gallon compared to $1.60/gallon in September more than offsetting the
higher corn price and pushing margins higher. Wet milling margins averaged
$0.53/gallon in October up from $0.36/gallon in September. The near-term
looks quite profitable, but future profitability will depend heavily on
whether the industry re-expands capacity in a rational way. On the
demand side, the industry could get a boost if the EPA decides on
December 1 to increase the regulatory blending cap from 10% to 12% or
even 15%. Ethanol already accounts for 10.4% of the U.S. gasoline supply
and next year's mandate of 12B gallons implies an even higher percentage.
Auto manufacturers have lobbied against such a move.
Soybeans. Tight supplies of soybeans and soy meal as well as rational industry
players kept crush margins at elevated levels during October. Margins
averaged $1.30/bushel in October down from September’s highs of $2/bushel
but still much better than the $0.75-1.00/bushel margins the industry normally
realizes. We expect capacity utilization to improve from the September lows of
65% as the large U.S. soy harvest is underway and currently almost 50%
complete. Spot margins should drift down toward the high-end of the normal
range but we think utilization will be very favorable for U.S. crushers until the
South American crop is harvested in April due to the tight supplies of soybean
byproducts globally. We think this will mean above average oilseed processing
margins for ADM and BG during their December and March quarters.