Ethanol Futures

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Here is a story from Bloomberg on ethanol futures: http://www.bloomberg.com/news/2011-03-25/ethanol-futures-decline-as-corn-falls-on-global-demand-concern.html

The March 25, 2011 article begins:

Ethanol futures declined in Chicago as corn dropped on concern global demand for the grain may wane.

The grain-based additive followed corn lower on speculation consumption from Japan could suffer as the country battled to avoid a meltdown at its Fukushima plant and as unrest swept across the Middle East and Africa. Ethanol is made from corn in the U.S.

“Ethanol was hampered by the volatility in corn, particularly in the physical markets, with both sides of the market unable to stick to numbers as prices whipped around,” analysts at SCB & Associates LLC wrote in a note to clients.

Look above at the Commodity Futures Trading commission (CFTC) "Commitment of Traders" (COT)report has to say. Talk about a thin market? One can only infer those traders have a lot of pull in Washington D.C.

WASDE

http://www.usda.gov/oce/commodity/wasde/latest.pdf


Today USDA released its latest World Agricultural Supply and Demand Estimates (WASDE)report.

WASDE stated: “Milk production is forecast higher for 2011 based on higher-than-expected January 1 dairy cow and dairy replacement heifer estimates."
This seems to be an inability to connect the dots in this report. For corn, a primary component of dairy grain mix, WASDE stated:

“U.S. corn ending stocks for 2010/11 are projected 70 million bushels lower this month with higher expected food, seed, and industrial use. Corn used for ethanol is projected 50 million bushels higher on a higher-than-expected November final ethanol production estimate and weekly ethanol data that indicate record output for December and January.”

Corn trading on the Chicago Board of Trade (CBOT) and near or over seven dollars a bushel for all three trading periods. The July 2011 corn price was $7.12 per bushel.
Ethanol futures soared to the highest price since July 2008, March 2011 ethanol futures closed at $2.457 a gallon. One bushel of corn is required to make about 2.75 gallons of ethanol. Recently, in America's cornbelt, the average ethanol distillery has been losing about nine cents per gallon.
So, with grain prices rising with apparently no end in sight, the prediction of increased milk production for 2011 is questionable.

Eye of the Beholder

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A commenter complained on Saturday's post that I had not taken ethanol subsidies to task. Ethanol certainly has driven up dairy farm feed costs, adding to other dairy farm concerns.

We truly need fair market prices for all farm products - not subsidies. But, dairy farmers have benefited from subsidies to grain farmers. As can be seen from the graph above corn farmers have lost money most every year. There would be no corn for dairy farmers without subsidies.

Many U.S. dairy farmers feel the Canadian farm milk pricing system is not market oriented. However, a recent study from Canada by, Peter Clark, president of Grey, Clark, Shih and Associates Limited. found U.S. dairy farmers are heavily subsidized. The study, according to a press release found, "U.S. federal, state and local governments continue to subsidize their agriculture industries with a labyrinth of programs that are conservatively estimated at over US$180 billion in 2009 and representing well more than half of total U.S. farm gate revenues of US$290 billion."

The release stated, "In summary, the subsidies to U.S. dairy producers are essentially equivalent to revenue the industry receives from the market place. This generous support enables U.S. producers to sell below their fully absorbed cost of production by insulating them from the need to earn a profit from the market. The support also permits insulation from international price pressures."

The selling price for a product, according to the dictates of capitalism, is costs plus profit equals selling price. The CME trading flies in the face of capitalism.