Available RIN stocks for 2012?

UPDATE:
It seems that the EPA in setting the 20% cap applies it to the RVO  not the mandate levels themselves, and since the RVO is on the gap between the total renewable and advanced mandate THIS WOULD CAP CORN RINS INCOMING FOR 2012 at 2,640 million gallons (not 2779 as below).

From a policy standpoint this decision by the EPA to implement the rules in this way creates less flexibility than if the 20% were applied to the nested mandates and not the gap. In this year and in a future drought year it could make a big difference.



I've seen questions and calculations of the availability of RIN stocks and how the industry may use this supply of 2011 conventional RINs to comply with 2012. Those are two very distinct questions as we don't have much of a history to go by in determining RIN stock holding behavior.

As I've said I've seen several RIN stock holding calculations including this one from the University of Illinois that contains at least 2 errors when it comes to application of the mandate policy..... Fortunately for them some of the errors are offsetting! I started from their table and fixed the errors I noticed. This isn't a big difference (200 million gallons of ethanol or so), however, the errors in the their calculation will become MUCH more problematic in future years!  

(Click on the table to enlarge)

 Calculating the RINs is the easy part of the calculation, determining RIN stock holding behavior is the bigger question.

I'd recommend THIS article out of Missouri if you want to understand RINs. You should be able to find the errors in the U of I calculation after reading it and also figure out why they might be a bit deal in the future. The RIN carry COULD be a big source of corn price stability depending on the elasticity of demand for RIN stock holding.

Lost another 4 bushels in corn and 1 bushel in soybeans

Dropped another 4 bushels of corn and 1 bushel of soybeans. I keep having to change the scale on the corn yield graph as it goes lower and lower. Please consider the post before this one and how my use of absolute deviations (vs percent deviations) from normal yields and how some may think this will end up giving be a distorted estimate of yields Notice too that harvested area is beginning to fall, that is why when yields fell 2.8% this week production fell by 3.4% as I dropped a half million acres out of harvesting. This can actually stabilize yields all else equal (which it usually isn't). I mentioned the difference between absolute and percent deviations which will be tested this year, but also, I've never been able to get any significance out of the condition data on corn harvesting in Iowa, but I can visually observe that in 1988 the harvesting rate was 94.6% while the 1986-2011 average is 97.1%.   There has even been a slight upward trend over time. The result for me is that I have a 97.7% harvesting rate for Iowa. So there is the potential for a few percentage point cuts in production in Iowa on this issue. The same is true for Illinois (no trend in Illinois but the harvesting rate in 1988 was 96.9% and the long run average from1986-2011 is   98.3%. The same holds for Indiana where harvesting rates are NOT condition driven. I simply haven't been able to get any significance out of the data, but I bet this won't be the case next year. For some states I do have condition variables which are significant so harvesting rates in Nebraska have fallen from 98.1% of planted acres several weeks ago to 95.7% in the most recent week. This will often give you a larger decline in production than in the estimated yield. Missouri shows a similar decline from 96.6% to  95.1% over the same period. 

Corn Yield:  141.9 bu/ac
Corn Production:  12,350 million bushels

Soybean Yield:  38.0 bu/ac
Soybean Production: 2,839 million bushels

Cotton Yield:  806 lbs/ac
Cotton Production 18.875 million bales

GREEN DOTS are trade estimates at the time they were issued

Comparison to 1988?

Having pulled earlier than current weeks, the point I was trying to make is that I almost can’t get the kind of deviations seen in 1988 because of the way I’ve structured the model. The conditions are equated to ABSOLUTE yield drops. So when an acre goes from Fair, to Poor, this means that acre drops by a yield volume, not a percent of trend yield. Will that be important this year? I don’t know. This only becomes important in the most extreme years. So to get a 39% drop in yields this year would take far worse conditions than in it did in 1988 given the way the model is structured. 

This comparison to 1988 with the large reduction in trend yields got me thinking last night so I did some calculations last evening with the model, which for whatever reason predicted the USDA maize yield exactly for this month’s report (and so it provides a good starting point for a comparison to 1988).

First let me state the problem with a simple comparison to 1988 was that conditions at this time of the year were better than they are currently for this point in July. No! they declined substantially in the July 10th report to the following....... 

For this week in July in 1988, conditions were as follows

Very Poor-18%

Poor-32%

Fair-36%

Good-16%

Excellent-2%

They currently stand at

Very Poor-12%

Poor-18%

Fair-30%

Good-34%

Excellent-6%

After the big drop the crop didn't change much after that
and this was the condition of the crop in August-September and I used this in the following calculation. 

Very Poor-16%

Poor-36%

Fair-30%

Good-15%

Excellent-3%

Definitely things ended up worse than where things stand now.

So I did some simple experiments taking out trends in yields, putting in 1988 conditions (for states that were reporting then as maize area has expanded, if no data were available I included current conditions) and also putting in 1988 area (as the geographic mix isn’t irrelevant given maize’s movement and the 42% larger corn area in 2012 than in 1988!  )

The ACTUAL yield in 1988 was 84.6 bu/ac.

When I take the model and put in available conditions from 1988, take out the trend back to 1988, and put in the area from 1988 I get 85.7 bu/ac so the model seems to replicate history fairly well, off by only 1 bushel.

If we come forward, putting back in the trend, put in the current planted area, so the only  thing that is different is I’m putting in conditions in 1988 in the model for those states available I get the following

Early September conditions from 1988 = 137.2 bu/ac  (Before the big drop in conditions in 1988 I would get about 157 bu/ac). 

I don’t get anything close to a 39% decline from trend discussed in the article even with conditions as ‘’bad’’ as 1988, a significant part of this would be the assumption embedded in the model which assumes absolute deviations based on conditions instead of % deviations, itself an assumption that the crop is better able to handle abiotic stressors than it was 1988. The outcome for crop yield distributions (the coefficient of variation) is a heavily debated one*

Given historical USDA behavior and accumulation of crop damage, we could possibly see yields fall further, but I would be shocked if we hit 1988 style deviations. Of course as I do this primarily as a hobby I could be way off!

(the specification of the model implies constant absolute deviations based on condition, not percentage deviations based on conditions, which shows my own personal bias)

(the model calculations above are the average of either weeks 9-10 for current conditions or weeks 19-20, mid September, for final conditions. )

(I did NOT adjust planting progress to 1988 numbers which does impact final yields and probably gives a small unwarranted boost to yields for this year). 

Race to the bottom, Corn yield 146bu/ac Soybeans 39bu/ac and cotton holding at 18.8 million bales

Yet another week of big declines and a race to the bottom edge of the trade estimates I've seen recently although with each new release the trade moves further down. Remember, these are subjective data and, in my opinion, sometimes captures peoples ''feelings''. But make no mistake, in some places (locations in Illinois and Indiana for instance) things are clearly very bad. See a state by state comparison below to see the geographical effect of the drought.  (spreadsheets with all state numbers for corn, soybeans and cotton available on request). 


Corn Yield:  146.0 bu/ac
Corn Production:  12,789 million bushels

Soybean Yield:  39.0 bu/ac
Soybean Production: 2,920 million bushels


Cotton Yield:  800 lbs/ac
Cotton Production 18.886 million bales


We have had continual declines in yields in Illinois and Indiana but we are starting to see some declines in Iowa. While the corn still looks reasonably good back home (Eastern Iowa) but worries are mounting. If we look at the graphs by state below you can see that up until recently the model was holding Iowa corn and soybean yields pretty stable, they have begun to decline in the last couple of weeks as temperatures have risen and drought conditions expand. Should conditions improve or stabilize, the farmers in Iowa and Minnesota might have both a decent crop and benefit from the nice run up in crop prices. This will come at the expense of farmers in Illinois and Indiana. While it did rain in Champaign (IL) I don't get the impression that it was sufficient to change the story-line.  NOTE that I use Nebraska for corn and Missouri for beans in the state breakout graphs below, and again, spreadsheets available on request. 

What is rising faster than corn prices? RIN prices

RIN prices, the tool to show compliance with US mandates are still cheap but have risen by over 60% in the last two weeks, far more than maize prices themselves. It looks like the biofuel sector is taking notice and starting to ration itself. RIN carry was very high into the year and so with this short crop we have that quantity to play with in reducing maize consumption this year. With the way the mandates work and some approximation of carry in, there is about 25 million metric tons that could be cut from biofuel maize use. Now it won’t be that large, folks won’t want to expose themselves to the risk of carrying out NO RINs into 2013, but we could see a reduction in RIN stocks and thus less maize demanded than would be determined strictly by equating the mandate gap with the maize needed to fill it and a decline in use of maize for ethanol is certainly a strong possibility. Add to that the little understood fact that the carry in limit applies to totals and not the gap created for maize and that is another (admittedly small) 3.5 million metric tons of play in maize demand.


RIN prices in the 2012 vintage have moved up from a recent low (not giving exact prices) of just over 1 cent a gallon go just under 2 cents a gallon in the last couple of weeks. Seems to me there is some upside potential in this market, of course there is always the risk the EPA could wade in with a waiver cutting RIN holders off at the knees if things get bad enough.......

Some Math at the extreme (and in bushels!)

My math was off in the metric tons calculation so I’ve fixed it.

I’m going to talk in calendar year because that is the mandate timing, you have to convert back to guess at the effect in crop years, so I’ll use a standard conversion and the calendar numbers.

If your corn grind is 4.82 million bushels (2.74 gallons per bushel) to make the conventional mandate gap (this gap in the mandates that maize starch ethanol can access) of 13.2 billion gallons, then this represents a use with no flexibility or RIN carry. However there is 20% RIN carry in allowed and we most certainly over produced for the 2011 mandate. BUT it isn’t 20% of the 13.6 mandate because that isn’t really a mandate, it is a GAP in the mandate system. It is really 20% of the individual mandates and you can’t exceed 20% carry in on any of them individually or in the total. So let’s see what we have with respect to the other mandates, probably zero carry in for cellulosics, we probably didn’t import much more than we needed for the 2011 obligation (tariff effect?)  and with all the fraudulent biodiesel RINs and the weird inversion of 2011 to 2012 vintage biodiesel RINs prices I doubt we had much of any carryover of biodiesel RINs into 2012. So if we ignore those (say the advanced and sub-categories RIN carry are zero), the amount that you could use of maize based ethanol RINs carried in from 2011 isn’t   ( 0.2*13.2billion gallons) = 2.64 billion gallons of RIN carry but the whole total of (0.2*15.2billion gallons) = 3.04 billion gallons of RIN carry potentially. So at the extreme, if you have zero carry in of non-maize biofuels and you carry out zero RINS into 2013, there is 3.04/2.74*1000 =  1.1 billion bushels  (28  million metric tons) of play in the demand for maize to produce biofuels.  This is of course at the extreme because it probably wasn’t zero carry of non-maize RINs into 2012 (but I bet it isn’t large) and at the same time, I don’t know for certain how many conventional (maize based in this case) RINs were carried into 2012 but you could approximate this. Also folks won’t want to carry in zero RINs into 2012 so they won’t run RIN stocks down to zero, but at any rate, there is room for some rationing on the ethanol side!

So 4.82 billion bushels needed? What fraction of the 1.1 billion bushes it could potentially be reduced exists and is reasonable? (again, I think this is a very large fraction) and how much are folks willing to draw down RIN stocks (the bigger question and why RIN prices will be interesting this year)?

I’m not going to yet guess what grind will actually be.

Seth

Declines accelerating and spreading with drought impacts for corn

Corn Yield:  150.6 bu/ac
Corn Production:  13,255 million bushels

Soybean Yield:  40.2 bu/ac
Soybean Production: 3,010 million bushels

Greetings from Rome everyone:

It has apparently been more mild and cool here in Rome than has been experienced across the Mid-west this past week. I’ll set aside that apparently there was more snow accumulation in Rome than in Columbia MO this winter too!

The acreage report had little impact on corn production despite the increase in acres as the geographic shuffling of acres out of Iowa and into Illinois and Indiana where the drought was having the largest effect resulted in little production change. This week we see declines across the board, including Iowa, as the decline in yields and production gain speed. These are of course subjective measures and they tend to be influenced by short run events on occasion (cotton conditions and hurricanes is a good example*) so we will see how these numbers hold into next week. I will say that the effects appear to be spreading with a large decline in Iowa this week although still smaller than the declines in Illinois and Indiana again.

*I keep trying to find time to do additional commentary but as this is for my own entertainment, I’m limited in the amount of time I have. Remember, these are subjective data. A few years ago, when a hurricane came ashore, cotton conditions fell for two weeks then quickly rebounded. The short run extreme weather event colored folks perceptions of the crop. Now the drought is pretty severe so I’m not suggesting a jump back up next week, but it will be interesting to see if the declines continue so strongly in the next two reports.

More corn acres but not much additional production

Some noteworthy changes from the USDA Acreage report, particularly from some geographical switching.
1) Corn acres were adjusted up by 500,000 acres but I'm showing a more modest bump in production. Why? Acres increased in Illinois and Indiana where the drought seems to be hitting the hardest and shifted out of Iowa where things have thus far remained okay
2) Soybean acres jumped a bunchy and add to that the trade of  from 1) where bean acres in Iowa jumped while they fell in Illinois and Indiana and you get a nice production increase for soybeans from this acreage change.
3) the change in cotton acres (a drop of 600,000 acres) trimmed 1 million bales off of my estimate I'm down at 19.6 million bales which is still a large production number given  my US harvesting rate (read Texas) is much higher than that proposed by USDA.