The outlook for biofuels is strong, less so for grains and agricultural supply
A year ago, CoBank signaled that the grains, agricultural supply and biofuels sectors would face a mixed outlook due to a combination of rising costs, supply chain bottlenecks and high energy prices. But 2022 turned out to be even more tumultuous than expected given Russia’s invasion of Ukraine, decades-long high inflation in the United States and Europe, and a sharp economic slowdown in China.
Interestingly, diversified US agricultural cooperatives generally outperformed above-average results driven by agronomy-related sales and services, including in the wake of supply chain disruptions for fertilizers and chemicals. Meanwhile, ethanol producers defended margins (even with slowing gasoline demand) through prudent commodity risk management and operating efficiencies. Looking to 2023, we see an environment of margin pressure amid a slowing economy, rising interest rates, high labor and energy (ie diesel fuel) costs, and trade uncertainty with China and Mexico. Continued drought and volatile weather remain additional risk factors for crop production. Demand for animal feed is weakening, reflecting overall flat growth in the domestic livestock sector.
Grain elevators and traders face a mixed outlook for the coming year. On the downside, grain exports were stunted in the fourth quarter of 2022 by transportation bottlenecks on the Mississippi River and reduced purchases of soybeans and corn by China, which could result in opportunities losses for the current business year. And then there’s the situation in Mexico: The country’s president decreed that Mexico would ban the import of genetically modified corn by 2024, which would have jeopardized about a quarter of all US corn exports. from Mexico recently suggested that the ban be delayed until 2025 and it now appears that US corn exports to Mexico will continue unabated for the next two calendar years. We continue to believe that the GM corn debate is a bargaining tactic in Mexico’s quest to improve US-Mexico energy trade policies.
On the bright side for US growers, Ukraine’s grain and oilseed production and exports are likely to remain constrained for years to come due to the conflict with Russia. This will provide underlying support for grain prices and help US corn exports. Finally, combined global ending stocks of grains and oilseeds remain very tight after falling for four consecutive years at their level lowest since 2013/2014. It will take at least a couple of years to build stock to a more comfortable level.
Farm retailers start 2023 on a solid financial footing, but face several challenges. Labor shortages and rising wages will have a negative impact on margins. In addition, wholesale fertilizer procurement costs will remain high through the first half of 2023, as cooperatives not only absorb the high costs of barges and trains, but also compete with export markets for a supply limited. Around 70% of European fertilizer production was offline during the third quarter of 2022, as the region grappled with record natural gas (feedstock) prices.
Fertilizer prices are likely to start and end 2023 at elevated levels, minimizing the opportunity for retailers to capture the same level of freight margin that was available during 2021/22. The outlook for biofuels is very strong, supported by federal policy and demand tailwinds beyond 2022. Ethanol will benefit from increased E15 use, growing demand for corn oil, and strong fuel prices. carbon dioxide. Carbon dioxide, a co-product of fuel ethanol production, is experiencing increased demand from both industrial users (food and beverage companies) and carbon sequestration projects. The momentum behind renewable diesel will continue to grow as new soybean crush processing and oil refining facilities come online, supported by the Inflation Reduction Act of 2022.
This article, written by Kenneth Scott Zuckerberg, is part of a series of articles on CoBank’s 2023 outlook. To read more click here.