December 24, 2007

New US energy law to support corn, soy prices long term

The expansion of the renewable fuel standard in the new US energy bill raises the bar for biofuel production as well as increasing the longer-term demand for corn and soyoil.

The renewable fuel standard raises biofuel mandates to 36 billion gallons by 2022, with corn-based ethanol raised to 15 billion gallons by 2015 as well as the establishment of a mandate calling for 1 billion gallons of biodiesel production by 2012.

"The passage of the new RFS is extremely positive for corn and soyoil, the primary feed stocks for ethanol and biodiesel in the US," said Michael Swanson, agricultural economist with Wells Fargo Bank in Minneapolis.

Obviously, anything that increases demand for a product will increase its price or value, Swanson added.

The standard is seen as a longer-term supportive feature, indicating demand growth over the years to come. It provides a demand floor for both corn and soys, with acreage, weather and yields key influences in how the market reaches these mandates, industry analysts said.

The government is showing they have a strong commitment to renewable fuels, and that solidifies the need for higher acreage and larger yields for corn and soys, said Don Roose, president US Commodities in West Des Moines, Iowa.

"This also makes the current high prices not just a flash in the pan," Roose said. This continued demand stream moves prices to new levels, as it will be hard in the foreseeable future to rebuild supply cushions without a sizable jump in yields, as land expansion is limited, Roose added.

"The biofuel mandates as prescribed in the new energy bill are unambiguously bullish for agriculture commodities," according to a research report from Morgan Stanley analyst Hussein Allidina.