Wheat ethanol plants are anxious about the price they might have to pay for some of their feedstock this fall.
Record wet conditions in much of the Prairies and the looming potential for fall frost damage means plants will buy more wheat than usual on the spot market.
“We are a little bit shorter than what we were hoping to be on our total contracting amount,” said Dale Williamson, manager of supply and logistics for Terra Grain Fuels, Canada’s largest wheat ethanol plant.
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Seventy-five percent of the acres Terra contracted with growers last fall were seeded this spring, although two to three percent may have been lost to flooding.
That means the 150 million litre ethanol facility in Belle Plaine, Sask., will be forced to buy some of its winter, Canada prairie spring and soft white wheat straight off the combines this fall.
Williamson has watched rising Chicago wheat futures and doesn’t like what he sees. On Aug. 6 the September contract was trading near $7.85 US per bushel, up about $3 since the beginning of July.
Terra may have to do something it has never done before if wheat climbs too high this fall.
“We’re going to have to look at the alternative of buying corn,” Williamson said.
That will be a common refrain from wheat ethanol makers this fall, said Brad Wildeman, president of Pound-Maker Agventures Ltd., a 13 million litre ethanol plant in Lanigan, Sask.
“We’ll see U.S. corn coming into Canada,” he said.
Competition from corn will limit No. 2 or lower wheat prices because corn is a good substitute for wheat and can deliver up to 10 percent more ethanol per tonne of feedstock.
Switching to corn isn’t a problem for wheat ethanol plants. In Terra’s case, it would require $3,000 worth of screening equipment but could save the company a bundle.
Fall corn futures, which have been influenced by projections of a record U.S. crop, are $4.50 US per bu., which is significantly lower than wheat futures.
However, the switch to corn could be a big adjustment for Terra because it sells its wheat distillers grain to high value markets in Europe and Asia as a genetically modified-free, high protein replacement for dairy and aquaculture diets.
Williamson hopes the current run-up in wheat prices is a weather rally that will subside when harvest pressure arrives.
Economists with the International Grains Council and other market analysts believe the wheat market has over-reacted to problems in Canada and the former Soviet Union.
Wildeman thinks speculators escaping stagnant stock markets are also fueling the wheat price hike by putting their money into commodity markets.
“We just need to be patient and let some of this sort of work itself out,” he said.
Wheat isn’t the only commodity on the rise. Ethanol prices have increased 7.5 cents US per gallon in recent months.
Plants like Terra should be fine if
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POUND-MAKER AGVENTURES
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they can capture new sales at those stronger prices and avoid high wheat prices. However, margins will be squeezed if feedstock costs rise dramatically, Williamson said.
He is waiting because most of the wheat will need frost-free weather until mid-September to avoid serious damage.
Ethanol plants aren’t concerned about reductions in grade, but they do care about bushel weight.
Yield could be affected if frost hits before the wheat crop enters the soft dough stage.
