The blistering speed of all manner of economic and social changes caused by the response to the COVID-19 virus is making forecasting nearly impossible.
For example, with corn ethanol demand dropping like a rock, will American farmers boost corn acreage like they said they would when polled by the U.S. Department of Agriculture in the first two weeks of March?
The Prospective Plantings report pegged corn area at almost 97 million acres, up eight percent from last year. Soybean area was forecast at 83.5 million acres, up 10 percent.
Of course wet, cold spring weather last year prevented the planting of many acres, making the increases in this year’s report larger than normal.
Still, the forecasted corn acreage would be the second largest ever.
However, since the survey was done crop prices have fallen, with corn dropping more than soybeans.
When the survey was done the new crop price of soybeans was about 2.3 times the price of corn. In other words the soybean-corn price ratio was 2.3.
That level traditionally favours corn planting. But by April 9 as this column was written, that ratio had shifted to 2.5, a level that starts to favour soybeans.
So at least for now the relatively strong incentive for corn planting has withered away, perhaps reducing its acreage. However, there will likely be dozens of other virus and non-virus issues, including the weather, that will affect acreage by the time the seed is in the ground.
One of the reasons corn fell more than soybeans is the chaos in ethanol.
Remember, ethanol producers buy about 40 percent of America’s corn crop so if ethanol demand drops, so does the demand for corn.
And ethanol demand is collapsing in step with overall gasoline demand as the COVID-19 virus forces a large percentage of the world’s population to stay at home.
The USDA’s April 10 monthly supply and demand report slashed 375 million bushels of corn from expected demand from ethanol producers, dropping it to 5.05 billion bu. for the crop year.
Partly offsetting that loss of demand was the increase forecast for feed use, rising 150 million bu. to 5.675 billion.
Once the additions and subtractions were complete, the USDA pegged year-end corn carry-over at 2.09 billion bu., up 200 million bu., or about one percent from its March report.
Many in the trade did not expect the USDA to cut demand from ethanol producers so aggressively. Some said they were pleased the USDA took this approach rather than ratcheting down incrementally over several reports.
However, I expect the USDA will have to drop its ethanol demand number even further.
The demand cut in the report implies that monthly corn use for ethanol would drop from an average of more than 450 million bu. a month pre-virus to about 390 million in the months remaining until the crop year closes at the end of August. That is a decline of 13 to 14 percent.
However, ethanol production currently is down a lot more.
Production was averaging about 1.05 million barrels per day (bpd) before the virus struck. In the week ending April 5, production had fallen to 672,000 barrels, a drop of 36 percent. Even with these cuts, production was surpassing demand and so stocks were rising fast.
Production will likely remain weak for months.
On April 7, the U.S. Energy Information Administration forecast that ethanol production would average 630,000 bpd for the April to June quarter, a drop of 40 percent from the pre-virus period. For the July to September quarter it sees a slight recovery to 820,000 bpd, but that is still a 22 percent decline from pre-virus.
These numbers make it clear that producing hand sanitizer does not make up for huge cuts in fuel use.
Ethanol producers are suffering not only from reduced demand but also much lower prices as its value declines in step with falling gasoline and crude oil.
Crude was hammered not only by the stay-at-home orders but also the price battle between Saudi Arabia and Russia, which saw the two powerhouses expand production in a war of attrition.
But bending to international pressure, the Organization of Petroleum Exporting Countries plus Russia agreed on April 9 to drop output by 10 million bpd, or about 10 percent of world production, although some reports said 20 percent.
Market forces could pressure reduction of another five million bpd from non-OPEC countries such as the United States and Canada.
However, given that worldwide fuel demand is down about 30 million bpd because of the fight against the virus, these reductions were considered inadequate and unlikely to significantly raise crude oil prices.
As one analyst put it, they needed to move mountains and they moved a hill.