Colorado Corn Cultivating Opportunities

By Gary Wilhelmi
DTN's Man on the Floor of the CBOT, CME

The development of the alternative fuel industry is quite an interesting story -- a true tale of American ingenuity. What makes it especially enjoyable for me is that the grain, energy and financial markets are like scoreboards on the progression of the refueling of America. A new wrinkle is the expansion of the export market for DDGs. I noted a sale to Israel just recently and feed-grain-starved Europe is a hot prospect. A half dozen years ago few of us knew there was such a thing as DDGs.

All businesses have an ebb and flow and ethanol right now is suffering from a profitability squeeze after falling to near $1.50 from over $2.00 with corn holding in the $3.50 range. ADM, the largest ethanol producer, clearly has an edge in their great diversification of refinery assets. Large plants with lower operating costs, better organization and wider distribution channels give ADM a significant advantage over local operations. ADM, for instance, can easily switch production to the currently more profitable high fructose corn syrup, whereas smaller ethanol plants use dry milling technology and therefore cannot be used to produce HFCS. Competition, therefore, in part shifted to HFCS where ADM collides with Corn Products, Tate and Lyle, and Cargill. Simply put, they are the big league of the HFCS business.

Investment woes follow the competitive trail and that can really hurt the less flexible and financed local producers. Investor-owned operations have greater risk of the investment flight than farmer-owned facilities where lure of the soil is involved.

The price of crude oil measures the status of fuel interests on the international stage and in that regard not much has changed recently. Crude oil has been bobbing along around the $80 per barrel mark. One must keep in mind, however, that if all were stable among the oil-producing nations, oil would not be riding so high. Immediate chart resistance in crude is up around the $86 mark. But the world's high propensity for rampant unrest keeps $100 per barrel a possibility and in a full political conflagration $130 is a sobering benchmark possibility.

Watch out for congress' decision on its commitment to alternative fuels and most importantly how they want to spend the money. At the moment, well-researched cellulosic development appears to have a few lengths on the field.

It looks like we have dodged another hurricane threat on Gulf of Mexico facilities as the season comes to an end. Additionally, NOAA sees a warmer-than-normal winter for the eastern two-thirds of the U.S., which would make heating a little more tolerable. But prices as they are now will mean a 10 to 25 percent increase in heating oil and natural gas expenses.

Finally, the supply and demand update last Friday shaved 100 million bushel off corn usage for ethanol. Yes, times they are changing, but the ethanol industry is not doomed, as some superficial analysts say. It is just evolving, like any new business.

Gary Wilhelmi can be reached at gary [dot] wilhelmi [at] dtn [dot] com

(CZ)

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