Flat production estimates.

I was way off on corn, but as discussed last week, you could see this coming (absolute vs. percent deviations of the model structure), however, I was very close on both soybean (within 0.3% of reported production) and cotton (within 0.5% of production ). Things haven't changed much since that time. 

I've put up a state by state comparison with USDA so you can look more closely at how the states compare to USDA estimates. I've also put up a graph showing the harvesting rate coming out of the model compared to USDA. If I used their harvesting rate I would be even further off on production than I am now (the model is specifically designed to incorporate harvesting losses). I was a bit surprised at the number of acres they held into production but with $8 corn and $30 harvesting costs, it doesn't take many bushels to make harvest worth while. 

Corn Yield:  139.2 bu/ac

Corn Production:  11,957 million bushels
USDA Production: 10,773 million bushels 

Soybean Yield:  36.5 bu/ac
Soybean Production: 2,719 million bushels
USDA Production = 2,692

Cotton Yield:  821 lbs/ac
Cotton Production 17.593 million bales
USDA Production = 17.650 million bales

I've been asked why I don't fix the maize model if I know it is going to be wrong (re-specify it with % deviations). This is a very good point. My only reason is I don't like to change the model during the growing season most years as in other situations I've found I would have made inappropriate adjustments and the model was doing just fine (not the case this year for maize!). Secondly this is all for fun at the moment so to think about the best way to re-estimate the equations in short order might take away from my day job. 

Notice the numbers for Oklahoma cotton. The large difference is a lack of proper synchronization between the harvesting equation and the yield equation. So the harvesting falls off rapidly but this increases the yield at a pace which isn't realistic and thus you end up with production which is far too high.

Here, the US harvesting rate is holding at just over 90%. We saw much lower harvesting rates in 1988 and 1993 but the argument goes that the number and location of livestock was different and we won't see the same type of maize chopping we did during those years.

Crop production and What are the RIN markets telling us?

Edited to add: Yes I think my maize yields are high, and I suspect it has something to do with the way I structured the model years ago (see discussion below). I always try to make few/no changes to the model during the season, but switching to % deviations at the end of the year will be investigated, depending on how this one turns out. The August report from the USDA has an error predicting final yields with a standard deviation of over 6 bu/ac, and doesn't really close on the final number until the October report. This year the September number may be better given the early harvest going on. 

I'm going to try to cover a few topics today with one post as I've had little time in the evening this week to get posts together. So I'd like to talk about some simple observations of the RIN markets that I hope you will scrutinize and criticize, tell you why I think I'm wrong about the corn yield and then give you my predictions anyway. 

What are the RIN markets telling us or maybe I don't speak the language?

First let me start out by saying I don't clearly understand the 2013 RIN prices and what these represent. I'm trying to figure out if these are forward quotes or some other specification. I'll make some comments on them but these are entirely contingent on them being forwarded RINs of some type. If anybody has clarification please let me know.

Conventional RINs

2011 = $0.01

2012 = $0.05

2013 = $0.08

In looking at conventional RINs, I think they suggest several things. With respect to the mandate either 1) the  low price suggests the mandate isn't all that binding and removing it might not have the large effect some might thing (See Irwin and Good here ) and/or the RIN prices include some probability that a waiver will come and devalue existing RINs. I would suspect it is a combination of the two. 

The 2013 value jumps another few cents, reflecting the drought and risk premium, and perhaps even a bit of a tightening blend wall. When I look at maize and oil prices in the futures market, maize prices are down (which would be negative for RIN prices) and oil prices are flat (higher oil prices should lower RIN prices). So this suggests it is either risk or the blend wall, at least to me. 

A back of the envelope calculation might suggest taking the RIN price, multiplying it times the number of gallons per bushel of corn and calculating how much the mandate is supporting the price of corn, overly simplistic? Probably for the reason it might reflect expectations of  a waiver already, but it is my starting point 

Advanced RINs

2011 = $0.49 

2012 = $0.49

2013 = $0.51

Advanced RINs are mostly flat all the way out, reflecting, perhaps, adequate sugar markets. I would argue the RINs give a good approximation to relative prices of ethanol in US and Brazilian markets and tell us all else equal (which it never is!) how much maize prices would have to rise with mandates in place until imports would start displacing maize ethanol in the overall mandate. 

First we might expect that 

Brazil ethanol price + $0.30 for transport - US maize ethanol price - conventional RIN = Advanced RIN

using round numbers for the day these RINs (a day or two old)

$2.85 + $0.30 - $2.65 - $0.05 = $0.45    So in the ball park for expectations.

Again, how much could corn rise all else constant before sugarcane ethanol and maize ethanol come into competition? (again the 2.8 is gallons of ethanol per bushel)

(advanced RIN - Conventional RIN)*2.8  = (0.49-0.05)*2.8 or about $1.23. Yes we are importing now and faster than last year, but we also have a 490 million gallon advanced mandate gap to plug in 2012, 3 times the size of last years. 

Biodiesel RINs

2011 = $1.08

2012 = $1.10

2013 = $ 1.23

For biodiesel, this tells me it is a long way from helping to fill the advanced gap by producing beyond its mandate. Keep in mind if you want to try the simple calculation to the price of soybean oil that the biodiesel mandate is on physical gallons but it produces 1.5 RINs per physical gallon. This should also tell you something about the expected production effects of a re-instatement of the biodiesel blenders credit!

Feel free to beat me up about this string of pure conjecture! 

On to crop yields and production.

Corn Yield:  139.2 bu/ac
Corn Production:  11,930 million bushels

Soybean Yield:  36.3 bu/ac
Soybean Production: 2,706 million bushels

Cotton Yield:  814 lbs/ac
Cotton Production 17.697 million bales

Here is where I paper up my excuses for being wrong on Friday! The graph just below is a illustration (not real model results) of what I mean when I said the model uses absolute vs percent deviations and how that is likely to effect the result. In the model the difference between a poor acre and an very poor acre is a fixed number of bushels, over time this becomes a smaller and smaller percentage of overall yields, thus it implies that the maize crop is better (substantially better) at dealing with abiotic stresses such as drought. This year has certainly called that into question. An alternative specification might use percentages in each class so the same conditions in 1988 would give you a similar percent deviation from the trend line and thus a MUCH lower maize yield than I currently have. I had hoped to run some of this analysis this week but as you can see, I've run out of time.  

I'm clearly above the trade estimates for maize, but I'm below the trade estimates for soybeans, or at least at the bottom end of the range. For cotton I dropped nearly 1 billion bales this week in production but I'm probably still well above the trade estimates for production and yields.

Production falling faster than yields

Corn Yield:  139.4 bu/ac
Corn Production:  11,983 million bushels

Soybean Yield:  36.4 bu/ac
Soybean Production: 2,712 million bushels

Cotton Yield:  804 lbs/ac
Cotton Production 18.551 million bales

Production is falling faster than yields. Corn yields were down (only!) 0.4% this week while production fell 1.2%. This is of course due to abandonment as another 661,200 acres dropped out of harvest. As the worst acres drop out of harvest, this actually supports the crop yields taking the worst land out of the calculation. This is particularly true for cotton. For soybeans, the harvesting rate is much less sensitive to condition so the harvested area change is far smaller. 

I suspect I'm high on corn yields, harvesting rates and therefor production. The trade estimates are a good 7 bu/ac lower than I am now and probably a million acres + lower on harvesting rates. Harvesting rates in the US appear to have been rising over time, so it is hard to tell if we will see the 86% harvesting rates seen in 1988 and 1993. If so, that would put us at about 83 million acres harvested. But one might argue that ''normal'' harvesting rates have risen by as much as a couple percent over the last few decades. Right now I'm running an 89% harvesting rate, which I suspect is too high. If one takes an 87% harvesting rate with a trade estimate 132 bu/ac you could shave another 900 million bushels off my estimate, putting the crop right at 11 billion bushels. 




Soybean yields continue to fall with Iowa conditions making dramatic changes. I don't know if I should believe those numbers as I suspect I'm well below trade estimates on beans now, perhaps as much as 2 bu/ac with the crop contracting faster than corn over the last two weeks. 

For cotton, I'm not sure what to comment on this other than the experts got together recently and pegged the crop at about 16.5 million bales. Who am I to argue with the likes of Carl Anderson and O.A. Cleveland?  I think once again, the model doesn't handle the trade offs between yields and conditions in a place like Texas very well.  I'm a good 2 million bales above the experts at the moment. 

RIN carry and why I'm coming up with a different number than most

I think the original spreadsheet on my blog may actually be correct…..waiting on some confirmation, does anybody have a good contact at EPA? It isn’t a big deal this year bout would add about 150 million gallons (50+ million bushels) to the available RIN stocks. The difference between the two assumptions for point 3) becomes a BIG deal in future years.

I’m no longer convinced I’m wrong about 3) so the spreadsheet on my blog MIGHT ACTUALLY BE CORRECT and there are more than 2.640 billion gallons of maize rins possible for a carry forward….look at the EPA rules.

Note the percentages are nested and the RVO is NOT on the gap…..

http://www.epa.gov/otaq/fuels/renewablefuels/documents/420f11044.pdf

This would mean if the carry in of advanced and sub-advanced wasn’t 20% then more than 20% of the gap could come in……. So the max carry is closer to the original one I had on my blog.

(---------------------ORIGINAL MESSAGE--------------------------)

Greetings from Rome.

This is my interpretation or I could just be wrong:

1)      First it isn’t that you can carry 20% OUT of last year into this year. It is that you can meet 20% of this year’s obligation with RINs from a previous year. That maters when the mandate is growing.  So if  the mandate last year was 90 and this year it is 100. Paulson’s calculation says you can carry out 90*.2= 18 when in reality it is that you can use 100*.2= 20  this year. So the 2520 constraint is incorrect.

2)      Pauslon uses net imports. He is correct in that exports lose RINs, you can’t export and then use those RINs for compliance. The problem with using NET-exports is that the imports are almost assuredly sugarcane ethanol which is by definition and advanced fuel. Unless the price of advanced RINS and conventional RINs are the same, you are not going to use those Advanced RINs to comply with the total mandate. So you should be using simply exports in the calculation.

3)      Finally, and this one seems to be not well considered is that the rule on carry is 20% of this year’s mandate can be met with last year’s RIN carry in.  Well there is no corn ethanol mandate despite what is constantly reported as a mandate which grows to 15bg. There is simply a gap in the total less advanced mandates that corn can qualify for. So the max carry-in isnt’20% times this gap as it isn’t even a mandate itself. It is 20% times the explicit mandates.   So how much corn could you carry in ? This is why there are those notes on the bottom of the graph about my assumptions of what was in the other classes. I’m probably wrong on those assumptions of how much other classes of RINs were available  but this is how the math should actually occur

You can find the language  as to why this appears true here http://www.gpo.gov/fdsys/pkg/FR-2010-03-26/pdf/2010-3851.pdf 

Search for the section D. 20% Rollover Cap. Notice the 20% applies to the RVOs of which there are no corn ethanol mandates.  So.

You have

Biodiesel mandate*20% = max biodiesel carry

Cellulosic mandate*20% = max biodiesel carry

Advanced mandate*20%=max advanced fuel carry

Total mandate*20% = max renewable fuel carry

There is no corn mandate so in theory that isn’t capped in the way everyone puts it forth.

SO the point is, if you don’t MAX OUT the carry from advanced fuels, this leaves more that corn ethanol can carry from the previous year.

Advanced mandate = 2000

MAX advanced carry in is then 400 million gallons

Total mandate = 15200*20% = 3040 million gallons.

So if you were carrying in a FULL compliment of advanced RINs the amount of maize RINS you could carry would be 3040-400=2640.

However, given the fraudulent biodiesel RINs (and the weird vintage price inversion in RINs it caused), the fact that we had no cellulosic production and the fact that imports don’t look so large as to say we filled up the 400 million gallons, then we have greater room for maize ethanol to make compliance. So let’s say we carried in 100 million gallons of all advanced fuel types into 2012. That means we could carry in

3040 – 100 = 2940 million gallons of maize ethanol RINS to comply with the total and we would have used a total of 20% of last year’s RINs to comply with the total mandate.  The Real trick in this calculation is to know what the carry out was for all advanced fuels, but the number thrown out as the maximum that maize could under any circumstances carry forward is not that it could be higher.

*as an aside, could over carry advanced and then be forced to use it to comply with the total renewable mandate but they wouldn’t be worthless.  

Soybeans 36.8 bu/ac Corn 140 bu/ac Cotton 19 million bales

First some house cleaning. My guess that there were three changes that needed to be made in the RIN calculations (a few posts down) may be wrong for one of the assumptions. This only matters to those folks who follow RIN stocks closely.




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.


ON TO CROP PRODUCTION AND YIELDS

Corn Yield:  140.0 bu/ac
Corn Production:  12,130 million bushels

Soybean Yield:  36.8 bu/ac
Soybean Production: 2,746 million bushels

Cotton Yield:  811 lbs/ac
Cotton Production 19.035 million bales

The big news this week is in soybeans where yields fell another 1.2 bu/ac (or 3.2%) with production falling to 2.476 billion bushels (or 3.3% , abandonment response is very low in beans). In looking at the individual state movements, Iowa conditions took a significant downturn in soybeans this week. The path is consistent with other surrounding states (down!) but the drop was huge! I'm a little skeptical of this move (or I should say the model's response). 10% of the crop fell from good down to poor and very poor, skipping fair condition altogether.

This follows the moving focus towards the bean crop as the corn crop has already taken a beating. For corn this week I ''only'' dropped another 1.9 bu/ac to 140.0 bu/ac but I think the market is trading in the range of 135-137 bu/ac. I've got production of 12.12 billion bushels. I think the issue of abandonment (see below) is keeping my production number up beyond what I think is currently realistic along with the issue of percent vs absolute deviations in the model.

For cotton I remain 2 million bales above the USDA. I'll have to see what Dr. Carl Anderson, Dr. O.A. Cleveland or Dr. Gary Adams are saying to determine how far off I think I am. The information I'm hearing is I'm not even in the same city, let alone neighborhood. This project was started to try to get a handle on cotton yields and production and while it has done a good job for corn and soybeans, its success in cotton has been quite variable.Once again, cotton is causing me significant trouble.

ABANDONMENT


When estimating equations, conditions didn't always come in as significant in the abandonment equation for corn in places like Iowa and Illinois even though we saw a dip in harvested area in 1988. I did drop 735,000 acres from harvested area on this drop in conditions and I'm now under a 90% harvested to planted area but I think it is likely that this number is still to high (historically it was 86.0% in 1988 and 85.9% in 1993). This means that the equations are probably overestimating harvesting rates for a few states by 1-3 percent (maybe more) and this will directly effect production by something a less than that percentage (as the model estimates planted area yields and some of the stuff that was on the lower end of the condition scale is the stuff that is abandoned). I have no reason to doubt harvested area numbers in the range of 84 million acres that I'm seeing reported.

Only 2 errors on RIN calculation?

This isn't clear to me, my original calculation below may be fine as the RVO is on the mandates NOT the gaps.....

Text from EPA

To implement EISA’s restriction on

the life of credits and address the

rollover issue, the RFS1 final

rulemaking implemented a 20% cap on

the amount of an obligated party’s RVO

that can be met using previous-year

RINs. Thus each obligated party is

required to use current-year RINs to

meet at least 80% of its RVO, with a

maximum of 20% being derived from

previous-year RINs. Any previous-year

RINs that an obligated party may have

that are in excess of the 20% cap can be

traded to other obligated parties that

need them. If the previous-year RINs in

excess of the 20% cap are not used by

any obligated party for compliance, they

will thereafter cease to be valid for

compliance purposes.

Link to EPA rule making
http://www.gpo.gov/fdsys/pkg/FR-2010-03-26/pdf/2010-3851.pdf


Relevant Text

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.