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Oil is not the Only U.S. Commodity in Trouble

Guest Piece by Nathan Kaspar

A good deal of this audience follows DBDailyUpdate for updates on the oil market. Much beyond Shale Oil, the broader commodity market is very sick. No, not with COVID-19, but from the ongoing lock-down of the national economy. President Trump took action yesterday to address meat packing plants staying open, but food production is much more complex than simply slaughtering animals and packaging the meat to go to the grocery store.

The Oil and Food industries were forever linked in 2005 with the passage of the Renewable Fuel Standards. This mandated certain blending levels of ethanol into our gasoline. While support of this is key if you are running for president and want to win the Iowa Caucus, turning half of the nation’s corn crop into fuel is dubious even if the government weren’t largely subsidizing it. Over the last 15 years though, the food markets have largely stabilized and reached “new normal” for how, how much, and what crops we farm to support the ethanol, human food, and animal feed industries.

The problem with this food and fuel link means that when there is a problem on the 90% side of the gasoline equation, the 10% side (Ethanol) is going to get cracked like a whip. Just like our nation’s oil producers are stuck with a surplus of oil with nowhere to put it, Ethanol producers also have no place to store additional production. As “stay at home” orders went from 2 weeks to months, Ethanol producers have had to change from slow-down, to shut-down, to extended furloughs. This is having a dramatic impact on food commodity prices, and it isn’t for the better.

Those prices can be found at the chart linked at the bottom of this piece.

The connection between ethanol and commodity prices is through distiller’s grains (both wet and dry). The byproduct of ethanol production is extremely high in protein and fat, and is sold in it’s wet form to feed lots or dried and sold to feed producers and dealers. These animals can’t simply eat whole corn in their diet as a substitute, so the result is that any commodity with protein in it is trading MUCH higher than last year.

The numbers for DDGS on the linked USDA chart are not valid. While there may be some long term flex contracts being fulfilled, most traders are simply listing (NQ) for DDGS. Most feed companies have been told that they can’t even think about taking delivery of DDGS until the 1st week in June at the earliest.

Some examples from the USDA chart of note:

Cottonseed Meal. $320/ton now vs $260 a year ago.

Bone meal is $335/ton vs $230 last year.

Corn Gluten Meal (byproduct from making corn syrup) is $582 vs $400 last year.

Wheat Mids, $140 vs $95 last year.

Corn prices, however, are terrible (trading at $102 vs $128 last year). This is only going to get worse as the ethanol shutdown continues. With half the nation’s corn crop going to ethanol every year, take 2 months out of that production and that’s 1/12th of the nation’s corn that is going to sit in a silo. Commodity prices are only starting to reflect it, and the cost of feeding animals is going to get much, much worse before the situation resolves itself.

This could very likely have long-term ripple effects through the harvest season in fall through November. Just in time for the election.

COVID-19 will likely be gone by the summer, but the shock-wave from the (largely unjustified IMHO) economic shutdown of the entire country is going to be felt for years.

If you have freezer space, put some steaks in it now. The people who are feeding the animals you hope to eat in 3 or 4 months are looking at the feed prices and trying to decide to sell off now, or allow their animals to be malnourished. Feed Lots with captive animals are having to pay exorbitant prices for their feed, and aren’t going to be able to pay ranchers enough at market to justify putting the cows on the trailer.

The time to completely re-open markets was 3 weeks ago. If you have the ear of a politician who supports the lock down, you might want to let them know how they are killing the food supply.

https://www.ams.usda.gov/mnreports/ms_gr852.txt

Nathan Kaspar

 

 

 

 

 

 

That is all.

Today’s news moves at a faster pace than ever. Whatfinger.com is my go-to source for keeping up with all the latest events in real time.

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