Welch on Grain: Ethanol Production Remains Strong; Drought Affecting More Corn

    Market Situation

    Crop Progress. The U.S. corn crop condition index slipped another point this week to 356. The changes reported today were a 1% increase in the fair category and a 1% decrease in corn rated good. The average index for this week of the growing season is 362.

    The corn crop maturity ratings are about normal with 93% silking (94% average), 42% in the dough (44% average), and 7% dented (11% average).

    The August Crop Report coming out this Thursday will include a yield estimate based on field surveys, followed by the Pro Farmer Crop tour later in August.

    The list of major corn producing states with double digit ratings of poor and very poor held at 9 this week (% change from last week): Colorado, 17% (+4%); Illinois, 12% (+1%), Indiana, 17% (+0%); Iowa, 10% (+0%), Kansas, 15% (+2%), Michigan, 10% (+1%), Nebraska, 16% (+2%); North Dakota, 25% (+0%), and South Dakota, 36% (-3%).

    The portion of the U.S. corn crop impacted by some degree of drought increased from 15% to 16% last week. The percentages in severe drought or worse went from 1% to 4% in Iowa, from 4% to 5% in Nebraska, from 28% to 26% in South Dakota, and from 31% to 30% in North Dakota.

    Grain Use. The August 2nd Grain Crushings report showed 437 million bushels of corn and 8 million bushels of grain sorghum were used for fuel alcohol production in June.

    Total grain for fuel so far this marketing year stands at 4.592 billion gallons. With USDA’s estimate of 5.560 billion bushels of grain for fuel in the 2016/17 marketing year (5.450 billion corn, 110 grain sorghum for food, seed, and industrial use) that means we need to crush an average of 484 million bushels in July and August to reach the target. That would be a higher level of use than we have seen since January.

    U.S. ethanol production for the week of July 28th was 42.686 million gallons per day, on par with last year and up 11% from the five-year average. For the year, ethanol production is running 4% above last year and 11% above average.

    Ethanol production has been steady since May at just over 42 million gallons per day. The seasonal tendency is for production to fall off towards the end of the corn marketing year. Last year, production increased late in the marketing year as the price of corn fell from over $3.78 in June to $3.02 by August, boosting ethanol production operating margins. Profit margins for 2017 have been mostly negative to just break even.

    Outside Markets. The July jobs report showed an increase of 209,000 non-farm payroll positions last month, just above the most recent four-month average of 198,000. The unemployment rate went down from 4.4% to 4.3%. The broader measure of unemployment, U6, which accounts for those working part-time but seeking full-time jobs, held steady at 8.6%.

    Michael Gapen, chief U.S. economist at Barclay’s was quoted in the New York Times that this was a “…Goldilocks report for the market”, neither discouraging nor overheated, boding well for macroeconomic growth.

    Marketing Strategies

    Seasonality. The seasonal price pattern for the December corn contract shows that prices tend to fall off after we know more about acres (June 30 Acreage report) and weather during the precipitation and temperature sensitive silking and tasseling stages (July).

    With dry conditions impacting major corn growing areas, yield concerns are propping up prices more so than we would see in a normal year, compounded by significantly fewer corn acres this year.

    2017 Feed Grain Marketing Plan. I am ready to price another 20% of the 2017 corn crop. My marketing plan calls for making this sale around the time of the August crop report when yield prospects are based on field observations. We are continuing to trade mostly in a range +/- 15 cents from the average closing price since the first of January of 390.

    Upcoming Reports/Events.
    August 10 – Crop Production and WASDE
    September 18-20 – Master Marketer, Castroville, Texas

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