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Friday, August 29,2008

Food-vs.-fuel debate changing

by DTN
Food —Argument shifting from bushels to acres Heavy rains flooded Midwestern cornfields in June, raising questions about what a severely crippled corn crop would mean to the ethanol industry. But improved seed hybrids and ideal weather may be turning the food-versus-fuel debate on its head. An August USDA production forecast of a 12.3-billion-bushel corn crop in the face of seemingly catastrophic corn losses in some parts of the Corn Belt has left ethanol supporters scratching their heads. "It was surprisingly high," said Rick Tolman, president of the National Corn Growers Association (NCGA). "Every year we have better germplasm traits that make that plant less susceptible to the environment. The flooding was bad, but when it dried, we had good moisture. We’ve had a pretty cool summer, and the heat stress is not there." The flooding raised doubts about the future of the ethanol industry and the ability of farmers to overcome crop disasters to continue meeting demands for food, feed and fuel. If the USDA forecast holds up, however, the debate could be shifting. Bradley D. Lubben, an assistant professor and extension public policy specialist at the University of Nebraska-Lincoln, said perhaps the focus should be on future land use. "The current food-versus-fuel debate is a great illustration of the role of politics over economics," he said. "As the adage goes, politics always trumps economics. In the short run, we are calling it a food-versus-fuel debate because the public perceives that the cause of food price rises can all be blamed on fuel prices and policies. That significantly shortchanges the analysis." One way to characterize the issue, Lubben said, is that "we are not competing for bushels; rather, we are competing for acres. The true test of supply response will be how we allocate acres among multiple uses, including crops, forages, grazing land and habitat, among other uses." Talk about how a transition away from corn ethanol to cellulosic ethanol will solve the food-versus-fuel problem is "an argument over bushels," he said. "The real argument will be over acres, and at present technologies, gallons of ethanol from cellulose could require as many acres of grasses and biomass as gallons of ethanol from starch from corn," Lubben said. For instance, in 2007, higher market prices encouraged more corn production, and producers planted 15 million more corn acres. In 2007, those extra corn acres largely came from other crops, Lubben said, mostly from soybeans and some cotton. In 2007 and 2008, he said, the prices for other commodities "joined the rally" and enticed acres back into other crops. Hosein Shapouri, an ethanol economist with USDA, said there are about 36 million acres of land in the Conservation Reserve Program (CRP). About 8 million acres of the CRP land are suitable for production of corn and soybeans, he said. In addition, there are 60 million acres of cropland in pasture, Shapouri said, and some of that acreage could be used for production of corn, soybeans and other commodities. Corn hybrid technology has made drastic improvements in the past 60-plus years. According to USDA, 85 million corn acres were harvested in 1944—the same as 2007. Yet the total corn production increased from about 2.8 billion bushels in 1944 to around 13.1 billion bushels in 2007, along with a dramatic increase in bushels per acre from 33 to 151, according to USDA numbers. By 2030, NCGA’s Tolman said, many of the major seed companies have told corn growers to expect 300-bushel corn to be possible. "Agronomists shake their heads at that number," he said, "but seed companies say it’s doable." Tolman said the corn industry has changed profoundly from the development of a biofuels industry. Farmers, however, believe they should have been getting $5 corn all along, and hope to see those prices even after cellulosic ethanol begins commercial production within the next five to 10 years. "It takes stronger prices to produce," he said. "There was no future in $2 corn. We see the cellulosic piece as evolutionary and not revolutionary. Frankly, corn is the first source of cellulose. We want corn to move into a higher value." That future could include using corn to produce more industrial chemicals and biodegradable plastics, for example. Most cellulosic-ethanol technologies in development right now will rely heavily on the ability of the U.S. farmer to produce so-called ‘energy crops’ such as switchgrass, miscanthus, prairie grass, wheat straw, corn cobs and, someday, corn stover, or the leafy part of the corn plant. Chris Hurt, an agriculture economist at Purdue University in Lafayette, IN, said emergence of biofuels has changed the agricultural landscape. "Fuel and food markets are now fairly closely linked by biofuels," he said. "But this is not to say that each will have all the grains and soy products they would like to have, or that usage in each category will be at the same levels as pre-2006." The ethanol-investment surge was a phenomenon moving from a planned capacity of about 6.1 billion gallons at the start of 2006 to a planned capacity of about 13.6 billion in August, according to the Renewable Fuels Association. So the surge in corn demand is coming in the 2007 to 2009 crops and totals about 3 billion added bushels of potential usage over those three crops, he said. Hurt said it’s rare to experience a demand surge "as large and well defined as the ethanol surge we are going through right now." As a result, he said that a "less dynamic period" for corn will unfold in 2010 and beyond. "I think it is also clear that food will compete effectively with fuel for corn supplies," Hurt said. "In fact, in the long-run, food will probably be able to outbid fuel because of the greater overall value of food compared to fuel uses for corn." — DTN -vs.-fuel debate changing.

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Friday, August 1,2008

No penalty-free early-out for CRP acres

by DTN
USDA will not allow landowners to take acres out of the Conservation Reserve Program (CRP) early unless the landowner agrees to pay the normal early-out penalties for breaking a contract, Agriculture Secretary Ed Schafer said last Tuesday. Schafer said the decision not to allow early out "strikes the best possible balance between supporting programs that protect our natural resources and meeting the nation’s need for grain production." The decision effectively means farmers wanting to void a CRP contract for 2009 crops would have to pay the USDA penalties to do so. In choosing to stand pat on CRP, Schafer said USDA completed "a very thorough review" of recent crop reports, weather conditions, commodity prices, and the likelihood of more land going into production. All of those factors allowed USDA to stand pat when it came to the penalties. "We realize we are in a situation that can change rapidly and quickly, but at this point in time, we are comfortable with the numbers we are seeing coming out," Schafer said. The impact of Midwest floods earlier this summer does not appear as severe as earlier thought. USDA reports show the country should potentially produce the second-largest corn crop on record, with an anticipated harvest of almost 79 million acres, he said. "We don’t feel the corn and soybean crops are going to be as bad as we originally feared," Schafer said. The decision not to allow early out of CRP comes less than a week after a federal judge limited a special USDA program allowing summer and fall haying and grazing on CRP acres. The federal judge determined USDA could not make such significant changes to the CRP program without first doing an environmental impact statement as required by federal law. Still, some agricultural groups and commodity end-users have been clamoring for USDA to tap the CRP program for more production acres. Conservation groups, wildlife groups and some farm organizations have argued the other way, maintaining the CRP is a conservation program and using that land for production could impact the environment and may not provide enough quality acres to alter commodity production. "There are a lot of groups that feel strongly about this issue either way," Schafer said. "So if you want to count that as pressure, certainly we have heard the message on both sides of the equation here. But, you know, the reality is we have acres that are coming out of the program because of expiring contracts." USDA reports there are now 34.7 million acres in the CRP, down from about 36.7 million acres last year. Schafer said another consideration was that the new farm bill maxes out the program authorization in future years at 32 million acres. Schafer pointed out that as many as 9.3 million acres could potentially come out of the program between now and fall 2010. In late September, contracts for 1.1 million acres are expected to expire. The potential expired acres jump to 3.8 million in fall 2009, and 4.4 million acres in 2010. "So, large blocks of land will be available for other purposes if landowners choose to pursue them," Schafer said. The penalty for canceling a contract before it expires requires a landowner to pay back every single dollar received under that contract, including cost-share money and rental payments, plus interest. There’s also an additional penalty of 25 percent of one year’s rental payment. High commodity prices and land values have prompted more landowners to take acres out of CRP early and put the land into production, despite the penalties. Over the past 19 months, landowners have paid penalties to pull out 288,726 acres from CRP, which included a high mark of 36,890 acres last May. Senate Agriculture Committee Chairman Tom Harkin, D-IA, one of the architects of the CRP program in the mid-‘80s, stated last week he thought Schafer made a sound decision not to approve early outs. Harkin had complained that allowing early outs now would be unfair to producers who chose earlier to pay the penalties necessary to get out of the program. He said a more gradual transition would be a more sound decision "for conservation and everyone with an interest in CRP." "Today’s decision also protects the public’s investment in conservation paid for through years’ worth of CRP payments," Harkin stated. "We already expect that millions of acres will exit CRP over the next few years as contracts expire and landowners choose to return the land to cropping." — Chris Clayton, DTN

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Friday, June 27,2008

Farmers prepare for higher fuel costs

by DTN
Farmers prepare for higher fuel costs Central Iowa corn and soybean farmer Charles Helland usually waits until closer to fall before securing his fuel needs for the season, but this year he’s planning to firm up fuel needs in the next week or so. "In the past, fuel costs haven’t varied that much from the beginning of summer to the end, so it wasn’t much of an issue,"" said Helland, who farms with his brother Mike near Huxley, IA. "But in these markets, who knows how high the price of diesel will be come fall?" Early-bird buying isn’t the only new habit for farmers. Helland also has been adding fuel storage so that he can time his fuel purchases and store all his needs. "We had two 1,000-gallon tanks and we added another 1,000-gallon tank a couple years ago. We also have a 500-gallon portable tank and two other 500-gallon tanks at other locations," Helland said. However, adding storage isn’t the answer for all growers. "We’ve seen producers increase from 500- to 1,000-gallon tanks and also replace old tanks for environmental reasons or to protect their investment," said Kevin Lange with Heartland Co-op Energy in West Des Moines, IA. "But for the average farmer, with all the containment and fire marshal regulations, to increase to over 1,000 gallons of storage is usually not cost effective." That can be true even for large producers. "Our goal was to have enough fuel storage to be able to buy a semi load of fuel at a time. But that didn’t work in some locations," said Gregg Halverson, CEO of Black Gold, a chip potato producer based in Grand Forks, ND. "We farm in 10 states, and each one has different environmental rules and regulations. You might end up spending a dollar to save a penny," he said. "We looked into installing bigger fuel tanks at one farm in Indiana, but once you get above a certain size, containment and set-back regulations can be cost-prohibitive. It would have cost us $150,000 in containments and set-backs to add more fuel storage at that farm. We said, ‘Forget it.’" The price of fuel has caused us to rethink our business model, Halverson said. "Now, we’re evaluating production sites as to how close they are to terminal use as opposed to looking at the most perfect production site with the best soils, and rainfall or irrigation." Brett Crosby, a cow/calf and irrigated sugar beet, malt barley producer in Cowley, WY, is looking at a more creative risk-management solution for his fuel costs. He has invested in the Deutsche Bank Oil (DBO) index fund and is working with Kansas State ag economics professor Kevin Dhuyvetter to see how closely that fund tracks diesel fuel. "For most farm operations, selling a regular heating oil futures contract is not an option because one contract is equivalent to 42,000 gallons of diesel fuel. Most farmers have about 1,000 to 2,000 gallons of fuel storage," Crosby said. "Right now, DBO tracks very well with the price of oil. For every dollar that oil has gone up, DBO shares have increased 37 cents. One share of DBO is equivalent to 11 gallons of diesel fuel," Crosby said. "If farm operations are worried about how to protect against rising fuel costs and need 1,000 to 2,000 gallons, they could buy 100 to 200 shares of DBO. The advantage is producers can buy in small increments and they don’t buy on margin." DBO shares currently are trading around $50 per share. On caveat is that "the fund is not accurate enough as a hedge for a move of 10 to 30 cents per gallon for diesel, but it can hedge a producer against a move of $1 or $2 per gallon," Crosby said. "I’ve hedged my fuel needs with DBO shares only to a small extent," he said. "And I haven’t advised anyone else to invest because I want to make sure there are not pitfalls out there in which the fund wouldn’t track well with oil prices. Right now it looks like a solid hedging tool. You can buy the shares with any brokerage. I have an Ameritrade account and it took 30 seconds to fill my order. I bought DBO shares a couple of months ago. Obviously, I’m looking brilliant now. But we’ll see what happens when the market gets more volatile." Cash buyers face the risk that energy prices could go substantially higher, but the possibility that crude oil could plunge below $120 or even $100 a barrel over the next few months is slim, pointed out Phyllis Nystrom, energy department manager of Country Hedging, a subsidiary of co-op giant CHS. She recommends that farmers and dealers manage some of their fuel risk by exploring the use of over-the-counter options or something like Country Hedging’s CHI Compass capped-average contract, which establishes a maximum price. High premiums for those products have discouraged farm operators from taking advantage of those offerings in the past, she said during a June 17 DTN webinar on the topic. But considering the extreme volatility in the market today, some operators may want to rethink that objection. The Energy Information Agency forecasts that cash diesel prices alone could run $4.72 per gallon, up almost $2 per gallon from their 2007 average this summer. If such wide price fluctuations continue, the premiums for put options could be inexpensive insurance. Many farmers uncomfortable with over-the-counter options still use forward pricing as their main risk management tool for fuel. "We’re seeing a normal amount of forward contracting," said Mike Derickson with CHS. "Some producers are unsettled by the high price levels, so they’re buying as needed. For the most part, we’ve seen stable forward contracting in the past two years. Fuel prices are usually highest in the spring when refineries are taken down for maintenance, but there tends to be a dip in prices in the early summer," Derickson said. Unfortunately, that Memorial Day-early June dip of 18 percent to 20 percent has yet to materialize this year. "I tell my producers, since it’s hard to predict what will happen, the best thing to do in today’s economic environment is to keep your barrels full, forward contract some of your fuel needs and stay open on some of your needs," advised Heartland’s Lange. Randy Hertz of Hertz Farm Management in Nevada, IA, added that it is good risk management to have some fuel in inventory, but you also need to protect yourself against theft. "You have to put a lock on your fuel tank or have a switch inside the shop that turns on the pump. You also have to guard against inventory slippage from unauthorized use, such as by teenagers, neighbors or anyone else. The main thing is to make it inconvenient for people to steal your fuel," Hertz said. "Fuel still ranks under fertilizer, seed and rent costs, but when you go through a more than 4,000 gallons and diesel is over $4 per gallon, we try to not pay any more than we have to," said Iowa farmer Helland. — DTN

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Friday, June 27,2008

Wheat not yet cost-effective corn alternative

by DTN
Wheat not yet cost-effective corn alternative Amid fears that flood-induced acreage losses will push corn prices even higher, livestock producers are considering their options to find the least-cost feed rations for their herds. For now, wheat prices are too high to be considered a cost-effective alternative for corn, but that could change as flood damage is assessed and corn acreages losses calculated. "How this all turns out in the end will depend on what happens with the corn crop and the price of corn," said Gary Vocke, ag economist for USDA’s Economic Research Service. "We don’t know the result of all this flooding, what will be the consequences," he said. "Only after the water goes down will we be able to get a clear understanding of what happened." USDA has increased the feed and residual wheat use from only 60 million bushels last year to 255 million bushels this year, but Vocke attributed last year’s small number to high export demand and high prices. "Wheat was priced above the price of corn, so unless wheat was very, very damaged, producers would not feed it," he said. "This year, we expect our exports to be down and we have larger supplies, so we expect there will be some feeding." Still, cost will be the determining factor in any livestock ration. The hard red winter wheat grown on the Plains is still priced too high to work its way into livestock rations; however, a huge crop of soft red winter(SRW) wheat grown in the South and Southeast has pressured prices in those states and may be working its way into feed rations for pigs and poultry, Vocke said. Bill Dicke, a nutritionist for the feedlot consulting service Cattlemen’s Nutrition Services LLC, said he has heard some discussion of changing portions of cattle rations from corn to wheat, though he has not yet seen any changes. "It’s all price-related, and wheat isn’t necessarily that low in price," he said. "When producers can purchase wheat for the same price or below the price of corn, then it will go into rations, especially if greater supplies after harvest lead to lower prices." He noted that wheat does have several advantages over corn. First, it’s less costly to process than corn, and second, wheat starch is more digestible than the starch in corn, a characteristic that makes wheat a good fit in a ration with dried distillers grain, which has most of the starch removed during the ethanol-making process. However, there hasn't been a lot of research or work done in that area, he said. One concern producers may have about wheat is that they need to have several months’ supply. "If producers are going to feed wheat, they need to be able to know they can feed it for several months," he said. "You don’t want to jump in and out with wheat if you are feeding higher levels; you need to be more careful to adapt cattle to wheat than other ingredients." Galen Erickson, associate professor and beef feedlot Extension specialist at the University of Nebraska-Lincoln, said that wheat is digested rapidly and works fairly well as part of beef finishing rations. But because of the rapid starch digestion, producers may face some risks if wheat constitutes more than 35 to 50 percent of the diet on a dry-matter basis. Erickson said he expects that higher corn prices will likely lead to an increase in the price of all other alternatives, such as wheat, barley and grain sorghum. "All of these grains are interchangeable, at a price. Therefore, when one is priced competitively, as a general rule the usage increases, which leads to an increase in price," he said. So just what can livestock expect in regards to wheat prices and markets? DTN Analyst Elaine Kub said the SRW trade has really devolved into two completely different markets: the bullish futures market and the bearish cash market. Kub said it would be unlikely for wheat prices to fall below corn future prices, even assuming the most bullish supply-and-demand picture for corn and the most bearish supply-and-demand situation for SRW. "That’s because there are speculative traders who will always expect—and act to maintain—a premium for wheat prices over corn," Kub said. "We are seeing that now as Chicago wheat futures trade over $9 a bushel, even during a bearish harvest season, while corn futures are at $7.40." To get a real feel for corn and SRW demand from consumers, one has to look at the cash markets where the difference in prices is historically low. That is more in line with the real supply and demand of those markets, Kub said. To some degree, wheat should always have a fundamental premium over corn, simply because it provides slightly different nutrients, but as wheat's abundance becomes more widely known in the northern half of the Corn Belt, those cash prices will be expected to continue to drop. "I would not be surprised if cash corn bids overtake cash SRW bids, especially in localized regions where SRW production is widespread and the corn is getting shipped west to delivery points or ethanol plants," Kub said. "However, we may have a month or more before the average SRW bids soften to something under $7 per bushel. Already, we can see the weakest basis levels—$2.50 or as much as $3.41 under the July futures contract—in the regions where harvest has gotten under way." — DTN

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Friday, June 27,2008

Small businesses search for next generation fuel feedstocks

by DTN
Small businesses search for next generation fuel feedstocks Robert Byrnes has all the proof he needs that biodiesel from camelina, restaurant waste and animal fat is a viable fuel source. To testify before Congress on recently, Byrnes made the 1,200 mile trek to the nation’s capital without using a drop of petroleum. Byrnes, a farmer from Oakland, NE, powered his Jeep using only farm-made biodiesel. He was one of five expert witnesses testifying before the House Subcommittee on Rural and Urban Entrepreneurship on second generation biofuels and their effects on America’s small businesses. "The idea was to try and quantify the potential opportunities," said Rep. Jeff Fortenberry, R-NE, after the hearing. "We don’t want people to have irrational exuberance." Lawmakers began the hearing by highlighting the need for more alternative fuels, given that gasoline is now running at an average of $4 a gallon nationally. They also emphasized looking at feedstuffs that do not compete directly with food or livestock feed, given the battles that are now taking place politically regarding food vs. fuel. Some of the new methods of biofuel production proposed recently come from crops many farmers may consider strange. Topping the list of potential biofuel sources are camelina, jatropha and algae. "Camelina is a nonfood crop, in part because it doesn’t taste very good," said Jeffrey Trucksess, executive vice president of Green Earth Fuels LLC, before the committee. A relative of the mustard seed, camelina can be grown all over the country, and may provide an alternative biofuel that doesn’t dent the world’s food supply, Trucksess testified. Farmers can work the crop into a rotation with their normal planting schedule, seeding fields with camelina every third year instead of leaving their fields fallow. "It fits in well, and you're not competing for wheat acres," Trucksess said. Trucksess also discussed plans to launch 50 trial acres of jatropha in Texas. Jatropha is resistant to drought and pests, and its seeds can be ground up to produce oil. Biofuels could prove to be a $22-billion industry in Texas alone, and create up to 100,000 jobs, Trucksess said. Algae could prove to be another nontraditional cash crop for farmers. Because algae doesn’t waste energy creating roots, it can absorb a much higher percentage of photons from the sun, said Tom Todaro, CEO of Targeted Growth and Sustainable Oils. "I’m pretty confident that help is on the way," Todaro said. "Well before the time oil depletes, biofuels really can make a significant impact." However, there are a few obstacles to harnessing this new energy source. Algae goes through two distinct growth stages. During one stage, it grows significantly, but doesn’t produce much of the feedstock necessary to create biofuels. During the second stage, it makes the feedstock, but doesn’t grow nearly as much. The trick is getting it to just grow first, and then getting it to just produce oil, Todaro said. Another issue is that algae’s enormous energy potential could be too much of a good thing and attract foreign competitors to the renewable fuels market. "Fifteen years from now, the biofuel everyone will be using is algae," Todaro said. "One of my big fears is that the investments made abroad are much greater than the investments that have been made here. Once you figure out how to do it, it’s deployable everywhere," he added. — DTN

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Friday, June 27,2008

Business advisor: 16 ethanol plants filing bankruptcy, many more to come

by DTN
Business advisor: 16 ethanol plants filing bankruptcy, many more to come The U.S. ethanol industry is in trouble and can expect to see a rash of bankruptcies and dismantling of at least some production, according to a specialist who helps companies in distress. Alex Moglia, president of Moglia Advisors based in the Chicago area, said he knows of at least 16 ethanol companies that are filing for bankruptcy, and there will be at least two to three times that number filing within the next year. Though he declined to give the names of companies involved, Moglia said, "There’s a whole host of them we’ve either looked at or handled." If Moglia is right, a U.S. ethanol industry shakeout that started last year is about to shift into high gear, potentially threatening the ability of the industry to meet mandates laid out in the Renewable Fuel Standard. Companies come to Moglia Advisors and similar firms to help save their businesses, which often can result in filing for bankruptcy protection. "Investors are just pulling their hair out in trying to restructure debt with lending institutions," said Moglia, who was hired early on to help the Central Illinois Energy ethanol plant in Canton, IL, prior to the company’s decision to file bankruptcy. "Everybody is stuck in this industry," he said. "Equity investors are stuck, the lenders are stuck, the producers are stuck, and even worse, with farmers who had supply contracts and marketing contracts, they’re stuck. The reality is that most of the players that are going to be active here are going to be funded by foreign investors." Moglia has led numerous corporate restructurings, acquisitions, workouts and bankruptcies in the past 25 years. Before founding Moglia Advisors, he held senior management positions with Continental Illinois National Bank and CNW Corp. Moglia currently serves on the board of directors of the Corporate Finance Association Foundation. The weakness of the U.S. dollar makes it possible for foreign investors to acquire ethanol plants "at a deep discount," he said. "They can buy as low as 20 or 30 cents on the dollar," Moglia said. "That should scare the hell out of anyone in the biofuels industry. I’ve worked with plants that are incomplete, others that can’t operate profitably so they’ve all shut down. This will shake out most of small- and mid-sized players. Larger players will survive because they have buying power." More ethanol producers will continue to file bankruptcy, he said, because of high feedstock costs and a "limited upside flexibility in terms of how much you can sell ethanol for." "The demand for ethanol is not there," Moglia said. "The same thing happening to ethanol is happening in the biodiesel business. It will be the Wal-Mart-ization of the ethanol industry. It’s just a mess." For the record, since 2007 there have been just four ethanol bankruptcies documented in the media and/or in court records, together accounting for 60 to 80 million gallons of production capacity. They include the following: Ethanex Energy Inc. based in Basehor, KS, an ethanol-development company that never did operate an ethanol plant, filed for Chapter 7 liquidation bankruptcy at the end of March; E3 BioFuels LLC in Mead, NE, filed for Chapter 11 bankruptcy protection in November 2007; Central Illinois Energy in Canton, IL, filed for Chapter 11 in December 2007 and was bought at auction; and California-based Convergence Ethanol Inc. filed for Chapter 7, also in December 2007. Christopher Grooby, an ethanol financing attorney with Washington, D.C.-based law firm Baker and McKenzie, said bankruptcy is becoming a possible solution for struggling ethanol plants. "My guess is bankruptcy is a very strong word," he said. "There are many plants now that are either under construction or in the early stages of their operation that still have debt and so are in restructuring talks with their lenders so that formal bankruptcy proceedings can be avoided." Joseph Peiffer, a bankruptcy attorney with Day Rettig Peiffer in Cedar Rapids, IA, said the number of ethanol plant bankruptcies Moglia cites is "about right." Peiffer said many ethanol plants are and will be folding because "the business model they were built on doesn't work." Farmers and their cooperatives have either borrowed money or pledged their land as collateral in building ethanol plants, he said. "Now they’re getting bought out on cents per dollar," he said. "Equity investors and people who made secured loans are not able to recover their investments either. Investors are losing and creditors are losing. Banks are looking at their losses and trying to minimize their loss." Julia Pettit, a biofuels attorney with Stoel Rives LLP in Salt Lake City, Utah, said while the number 16 seems "a little high," it is difficult to track ethanol companies going bankrupt. "I would say that’s probably a little high based on what I’ve been watching the last six to nine months," she said. "What’s also difficult is that sometimes a company doesn’t use the word ‘ethanol’ in their name, they use ‘energy’ or something else. It’s always difficult to track these companies. As to whether you're going to see numbers double, that’s somewhat difficult to predict. I think that there are certainly some projects that got financed way back during the heyday when ethanol was hot. It may just be that those projects don’t really have all the components to make them successful or viable." Pettit said Moglia "certainly has his ear to the ground and is very sensitive to the economics of these projects." "If you sit back and take a look at the whole industry, there’s no doubt there's a shakeout occurring," she said. "For what it means to the industry as a whole, it is not as bad as it seems. That's my perspective." Pettit said companies are either shutting down operations altogether or are still in the process of being constructed and deciding whether to finish. "We’re going to see targeted mergers and acquisitions," she said. "My guess is it’s going to be a company that put in a lot of equity up front and has a lender who just doesn’t understand an industry to work with them to get over the hump, or know how to venture into hedging arrangements. In those situations you have the lender really putting the screws to that company. These might be the kind of companies that need to seek bankruptcy protection to give them some breathing room." There are going to be times when ethanol producers "just don’t produce" to get "supply/demand in the place where it needs to be to operate," Pettit said. For every 10 ethanol and/or biodiesel plants "you read about in the media, there are probably 50 to 100 others that are in financial difficulty and are contemplating shutdown," Moglia said. "Lenders are restructuring the debt so the plant has a chance of servicing the debt on a monthly basis through the financial institutions," he said. "The investors, lenders and operators are holding hands and trying to ride out this economic cycle. They are suffering quietly because there are public policy implications also." Since ethanol production is mandated by the federal government, he said they are already "operating outside free-market fundamentals." "And when you are having activities operating outside free market, there are public policy implications," Moglia said. "There is an enormous reticence to allow the market to adjust. There are a variety of economic, labor or similar strategic reasons, which is why people pushed biodiesel and ethanol so hard. You have a homeland security issue affecting business enterprise." When it comes to the work Moglia Advisors does, he said, bankruptcy is usually a last resort. Moglia said that’s because it is expensive and full of time delays, and the "stigma of bankruptcy" could hurt a company for years to come. "Most businesses—biofuels or not—they get into trouble and they never see the inside of a bankruptcy court," he said. "Most of these settle outside of court. We tell people they just slash expenses to a minimum. In most cases, we suggest plants be mothballed for the next two to five years to see what happens. I spoke at an ethanol producers’ conference. Somebody raised a hand and asked, ‘What is the biggest problem facing ethanol plants today?’ I looked him straight in the eye and said, ‘Management.’ Unless you’re talking about a bomb hitting your building, or a meteorite hits your building or an act of God hits your building, management should have prepared and anticipated for such an eventuality." Moglia said many ethanol plants were started or funded by people "who did not have a background in process industries." "Just because you’re a good farmer doesn’t make you a good judge of a manufacturing enterprise," he said. "Too many people forget that making ethanol is different from growing a crop. Most ethanol operators could benefit from contacting a turnaround firm, for technical and refinance side. The minority will contact us; the majority will try to make things happen on their own. Most of those home-spun remedies will fail. Then they contact us when it is impossible to restart the plant or complete the plant." — DTN

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Thursday, December 20,2007

Chicago Merc increases Board of Trade bid

by DTN
Chicago Mercantile Exchange Holdings Inc. (CME) said it would increase the value of its $10 billion bid for the Chicago Board of Trade by adding a special dividend for owners of CBOT Holdings Inc. (BOT). The move, announced last Thursday, is designed to respond to a similar proposal from IntercontinentalExchange Inc. (ICE), which is pursuing a hostile bid for CBOT, the owner of the country’s oldest futures exchange. Shortly afterward, CBOT said it had rejected ICE’s latest offer. In its announcement, which followed a meeting of CBOT’s board, CBOT said the revised bid isn’t superior to its revised agreement with Chicago Merc. ICE’s revised bid, announced Tuesday, added the potential for shareholders to receive cash instead of stock. CBOT, however, said the revised bid didn’t adequately address strategic and operational issues such as integration and execution risk. CBOT and its special transactions committee also reaffirmed their recommendation that shareholders vote for the Chicago Merc purchase over ICE’s counteroffer. ICE’s primarily share-based bid has been valued higher than the Chicago Merc because the Atlanta energy market operator’s stock price has outperformed the stock of the Chicago financial futures exchange. Pressured by ICE’s success, Chicago Merc already has improved its bid once by giving the Board of Trade a bigger share of the combined new CME Group than it did when the deal was announced last fall. Board of Trade and Chicago Merc officials have said their deal will lead to an easier integration, and the big merger received a shot in the arm last week when the Department of Justice said the deal could go through without conditions designed to prevent antitrust problems. As part of the new proposal, all CBOT shareholders will receive a one-time cash dividend of $9.14 per CBOT share, or a total of $485 million. The new proposal also offers extra consideration available for each Board of Trade member that also has a right to trade on the Chicago Board Options Exchange. With the dividend included, those CBOT shareholders would get about $500,000. ICE and the options exchange recently agreed to pay these Board of Trade members about $500,000 each in a move aimed at settling a long fight between the Board of Trade and the options exchange over valuing the rights.   The Chicago Merc has pledged to fight the options-right case in court if it joins with Board of Trade, and is expected to continue to do so. Thursday, it removed the $15 million cap that it previously had on its legal spending for the case. The new dividend could make its merger proposal more competitive with ICE’s for the significant minority of shares controlled by Board of Trade members who want to see the options issue resolved in their favor. Board of Trade shareholders are scheduled to vote on the Chicago Merc acquisition July 9. Last week, ICE said it would wage a proxy fight to convince those shareholders to vote no. ICE Chief Executive Jeffrey Sprecher has successfully integrated past deals and has said a combined ICE-Board of Trade would form a fast growing agricultural and energy trading company that would take on the Chicago Merc for dominance in U.S. trading of futures contracts.

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Thursday, December 20,2007

California water may be privatized

by DTN
That’s 15 percent of the federally controlled water in California, which would make it the largest grant to irrigators since the U.S. Bureau of Reclamation was created in 1903, agency officials said. The Westlands Water District, a coalition of giant agribusinesses in the fertile San Joaquin Valley, draws its water from the Central Valley Project, a vast irrigation system that also supplies drinking water to about 1 million households. If drought-like conditions persist in the West, a deal would guarantee the farmers’ irrigation pumps will flow, even if that means some cities in the San Francisco Bay area will get less drinking water. “Can a proposal that appears to put a small group of farm operations ahead of the taxpayers and our fish and wildlife resources be justified because it may help one federal agency deal with a specific drainage problem?” said Hal Candee, a senior attorney with the Natural Resources Defense Council who is participating in the negotiations. Westlands declined to comment, saying Sen. Dianne Feinstein, D-CA, had asked participants to refrain from speaking about the negotiations in advance of last Wednesday’s meeting. Feinstein said in a statement that the purpose of the meeting is “to examine whether the serious drainage issues facing the Valley can be resolved.” The proposed settlement, documents for which were obtained by The Associated Press, would give the Westlands farmers a stake in a massive reservoir, millions of dollars in pumps and pipes, and permanent rights to enough water to serve 8 million people. It is one of two settlements being considered. The second proposal would offer landowners a contract for less water, but would still ensure that Westlands farmers get their water before cities in Santa Clara and Contra Costa counties. Westlands is the nation’s largest water district and its members include Harris Farms, one of California’s biggest farming operations, and Tanimura & Antle, the nation’s top lettuce grower. More than a decade ago, the district sued the government after a botched federal project left thousands of acres of cropland tainted by salty, polluted runoff, and caused the death or deformation of thousands of birds. The proposed water-rights deal would settle that lawsuit. Westlands recently hired two former Bush administration officials, one who is helping to negotiate the deal with the Bureau of Reclamation, a division of the U.S. Department of the Interior. Susan Ramos, a former assistant regional director at the Bureau of Reclamation, and Jason Peltier, former water policy adviser at the Interior Department, both took management posts at the district. Either plan would need congressional approval. Bureau officials say the proposals would be cheaper than an official plan registered with the courts that would cost $2.6 billion to retire almost 200,000 acres of tainted Central Valley cropland and clean up salty runoff from surrounding areas.

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Thursday, December 20,2007

Feds focusing on import safety

by DTN
Working to heighten public awareness on the Bush administration’s efforts to improve the safety of imports, two cabinet secretaries toured a small meat plant on Sept. 12 to talk about the importance of high business standards. Cracks in import safety have become a national focus this year with recalls ranging from pet foods to children’s toys. It has led to a political and consumer backlash that will place more demands on businesses and government officials to ensure foreign products are safe. The demands, however, are stressing the inspection system as the global economy and more trade deals open up U.S. ports to more goods. “I believe...that our current import systems are not keeping pace with the growth,” said Health and Human Services Secretary Michael Leavitt. In response, the administration has created an interagency working group on import safety that involves 12 federal departments and is headed by Leavitt. The working group provided a report to President Bush on Sept. 10 to push strategic goals of import safety. A follow-up report will be issued later in the year to reflect any new funding, restructuring or changes in law that may be needed to better link government departments mandated with protecting consumer goods. Leavitt and Agriculture Secretary Mike Johanns spent the morning of Sept. 12 talking with producers, business owners and front-line inspectors in Kansas City on the issue of import safety. The visit is one of several federal officials will be conducting to “make sure our ideas match reality,” Leavitt said. A key part of the import-inspection strategy will be to shift from intervening when tainted food is found to “prevention and verification” that will concentrate inspections and resources on food sources most likely to encounter contamination. Inspectors will concentrate more on trouble spots and use technology “to shrink the size of the hay stack” where the needle may be found, Leavitt said. Quality has to be built into products and there must be a process in place to ensure foreign suppliers are meeting U.S. quality and safety standards, the two secretaries said. “You can’t inspect everything,” Leavitt said. “If there is one thing I have found in my travels, it’s the vastness of the amount of products that come into this country. It’s not just food.” Such emphasis on import and export safety and quality is critical in agriculture, Johanns said. Agricultural exports will hit about $79 billion this year and ag imports will be about $70 billion, he said. Next year, each will increase about $4 billion in value, Johanns said. The crossover from manufacturing and imports from other sectors has an effect on agriculture because problems challenge the integrity of a country’s overall inspection and quality system. “Issues from one sector are very definitely going to impact other sectors,” Johanns said. Leavitt and Johanns toured Boyle’s Famous Corned Beef, which imports beef and pork from countries such as Chile and Canada. The company, which employs about 45 people, further processes beef, pork, chicken and turkey into marinated, sliced or pre-cooked products for retailers and restaurants. Besides being an importer, Boyle’s also exports its processed meats as well. Johanns noted he was impressed with Boyle’s traceability system, which can track the final destination of shipped boxes within hours, he said. A key issue for companies is the growing demand to track product ingredients from fork back to farm. That places particular focus on companies that import food products. “A lot of this is being driven by businesses who are seeing consumer reaction to this,” Leavitt said.

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