Grain, Oilseed, and Biofuel Outlook for 2009 Osage, Iowa December 18, 2008 Chad Hart Assistant Professor/Grain Markets Specialist chart@iastate.edu 515-294-9911 1

U.S. Corn Supply and Use $4.40 $4.00 Source: USDA-WAOB, Dec. 2008 +50 -300 -100 +350 $4.40 -0.40 $4.00 Source: USDA-WAOB, Dec. 2008 2 2

U.S. Soybean Supply and Use -30 +30 $9.85 -0.85 $9.00 Source: USDA-WAOB, Dec. 2008

World Corn Production Source: USDA-WAOB, Dec. 2008 Rest of the world corn production is projected to be up this year. But the increase is not coming from the usual suspects. South American production is projected to be down in 2008, while Europe and China have increased production. Source: USDA-WAOB, Dec. 2008

World Soybean Production World soybean production is up across the board. China, as with corn, is ramping up production. Source: USDA-WAOB, Dec. 2008

Crop Basis Patterns Sources: CARD, Iowa State; IA Dept. of Ag. While basis patterns are closing in on more historically normal levels, energy prices will likely maintain somewhat weaker basis than usual. Sources: CARD, Iowa State; IA Dept. of Ag.

Livestock Adjustments Sows farrowing: Sept-Nov 2008 3.01 million, down 5% from last year Dec-Feb 2009 2.98 million, down 3% from last year Broiler-type eggs set: 203 million, down 8% from last year Broiler chicks placed: 159 million, down 10% from last year Feedlot placements: 2.44 million, down 11% from last year Livestock consolidation is underway and with it comes lower feed demand. The recent reduction in crop prices can help ease consolidation pressure, but the economic weakness is also taking its toll on meat demand. Sources: Various USDA-NASS reports

Ethanol Margins Source: ISU, CARD Ethanol is basically at break-even as it has been for some time (unless you’re locked in). The futures for ethanol, corn, and natural gas do not show that situation improving any time soon. In fact, it may get worse before it gets better. Source: ISU, CARD

Biodiesel Margins Source: ISU, CARD The biodiesel outlook over 2008 is actually better than it has been. Biodiesel prices caught up to feedstock costs and margins have been relatively good over the past few months. The fall in both biodiesel prices and feedstock costs has held those margins above average capital costs. Futures prices indicate this pattern might hold for a while. Source: ISU, CARD

Renewable Fuels Standard (RFS) Calendar Year Billion Bushels 2009 3.75 2010 4.29 2011 4.50 Crop Year Billion Bushels 2008 3.57 2009 4.11 2010 4.43 Corn-based ethanol goes in as conventional biofuel. The tables show the amounts of corn needed to meet the conventional biofuel portion of the RFS with corn-grain ethanol. The Renewable Fuels Association lists current ethanol production capacity at 10.95 billion gallons, with another 2.8 billion gallons under construction. So ethanol capacity is large enough to meet the RFS for the next few years. 2009 is the 1st year for the biodiesel portion of the RFS, with 500 million gallons of biodiesel needed to meet the mandate. In 2007, we produced roughly 450 million gallons. And the U.S. has enough biodiesel capacity on the ground today to produce over 2 billion gallons of biodiesel from a variety of sources. 10 10

U.S. Blended Motor Gasoline Consumption One of the biggest factors influencing the biofuel industry is the overall usage of fuel. This graph shows the dramatic decline in projected gasoline consumption for this year and next. The higher energy prices earlier this year had a definite impact. Source: Energy Information Administration

Outside Influences (Jan. 2007 = 1) Agriculture’s link to the energy markets has been a strong one. Corn and soybean prices have tracked with oil prices since late in 2006.

Outside Influences (Sept. 2008 = 1) But the recent weakness in the Dow has pounded oil and the crops significantly.

Corn & Soybean Area Growth rate of 1.55 million acres per year While total land devoted to crop production has been fairly steady over the past few years, the amount of land planted to corn and soybeans has been on the rise. Minor feed grains and cotton have been giving up ground.

CRP Expiring Contracts Some CRP land has also come back into production. This graph shows the acreage with expiring CRP contracts. The contracts expire at the end of September in each year. So the land that can come out of CRP in 2008 can not enter production until 2009 at the earliest. Currently CRP has 34.7 million acres. But the 2008 farm bill has set 32 million acres as the top for CRP, starting in 2010. So an additional 2.7 million must come out over the next two years. Source: USDA-FSA

Input Costs Source: USDA, Agricultural Prices, Nov. 2008 Input costs have risen dramatically, especially over the past year. Source: USDA, Agricultural Prices, Nov. 2008

The Rise and Fall of Fertilizer Prices But some fertilizer prices are going down as fast as they went up. Source: http://www.fertilizerworks.com/html/market/ TheMarket.pdf

Ammonia Prices Source: http://www.fertilizerworks.com/html/market/ TheMarket.pdf

Iowa Corn Prices vs. Costs Average return over the time period, -7 cents per bushel. Current corn prices for Iowa are around estimated costs. Source: USDA-NASS and Duffy and Smith, http://www.extension.iastate.edu/agdm/crops/pdf/a1-21.pdf

Iowa Soybean Prices vs. Costs Average return over the period, 31 cents per bushel. Current Iowa prices still slightly above estimated costs. Source: USDA-NASS and Duffy and Smith, http://www.extension.iastate.edu/agdm/crops/pdf/a1-21.pdf

Crop Costs for Central Illinois Corn Soybeans 2008 2009 % Change % Change ($/acre) Fertilizer 118 215 82% 45 98 118% Fuel and Oil 19 26 37% Crop Ins. 8 12 50% 20 27 35% Utilities 3 4 33% Seed 62 78 26% 42 53 5 25% 18 22 22% Total Non-land Costs 388 529 36% 239 321 34% Cost projections as of this summer. Source: Schnitkey, July 2008

Rough Estimates for 2009 Iowa Corn Non-land Cost Land Cost Total Cost Expected Yield Cost per Bushel ($/acre) (bu/acre) ($/bu) 513.05 190.00 703.05 165 4.26 225.00 738.05 4.47 Based on Schnitkey’s percentage increase in non-land costs applied to Duffy’s non-land cost estimate for 2008 for Iowa. December 2009 Corn Futures = $4.3525 (12/17/08)

Rough Estimates for 2009 Iowa Soybeans Non-land Cost Land Cost Total Cost Expected Yield Cost per Bushel ($/acre) (bu/acre) ($/bu) 268.10 190.00 458.10 49 9.35 225.00 493.10 10.06 Based on Schnitkey’s percentage increase in non-land costs applied to Duffy’s non-land cost estimate for 2008 for Iowa. November 2009 Soybean Futures = $8.96 (12/17/08)

Crop Exports Source: USDA, PSD Exports have been fairly strong over the past two years and even with the revisions downward for the 2008 crops, export levels would still be considered historically good. As the financial crisis seems to be spreading worldwide, there are concerns about economic weakness, especially in developing countries, which would weaken the outlook for exports. Source: USDA, PSD

Exchange Rates (Jan. 2007 = 1) Source: OANDA.com Exports have been fairly strong over the past two years and even with the revisions downward for the 2008 crops, export levels would still be considered historically good. As the financial crisis seems to be spreading worldwide, there are concerns about economic weakness, especially in developing countries, which would weaken the outlook for exports. Source: OANDA.com

Pace of Corn Export Sales Source: USDA, FAS

Pace of Soybean Export Sales Source: USDA, FAS

U.S. Stocks-to-Use Ratios Even with the revision to higher corn and soybean ending stocks for 2007 and 2008, the U.S. stock situation is tight.

World Stocks-to-Use Ratios But the world has higher than usual soybean stocks. Corn stocks have been tight worldwide for several years.

Thoughts for 2008 General economic conditions Energy demand A lot of recent market trade has been tied to reaction to the financial crisis and the world’s response Economic slowdown raises concern about export and energy demand Energy demand Higher energy prices did constrain demand Will it recover? Most important ag. statistic: Crude oil price or Dow Jones Index Current futures are indicating 2008 season-average prices of $3.50-4.00 for corn and $8.50-9.00 for soybeans

Thoughts for 2009 and Beyond Many of the storylines from 2008 will continue Tight stocks for both corn and soybeans The competition for acreage Ethanol’s buildout & livestock’s adjustment Energy price & general economy concerns Market volatility will remain high Link to the energy markets More market players with different trading objectives Given current factors, the 2009 outlook is for crop prices around $4.00 for corn and $8.75 for soybeans Key factor: Economic growth returns by late 2009

Thank you for your time. Any questions. http://www. econ. iastate