Three weeks ago I wrote a journalist friend suggesting the Renewable Fuel Standard might be reduced to free up some corn. This was off the radar of most fertilizer stock analysts and traders.
He thought that was very unlikely.
Now, U.S. livestock and food producers and several members of Congress have rallied to force the EPA to waive the RFS. Two bills are being presented to downsize the corn buying required by the federal government's biofuel mandate. (here)
I have done a lot of work on corn ethanol - more than anyone I am aware of covering the fertilizer stocks.
Visited plants throughout the Midwest in 2007. I met US BioEnergy, Verasun, etc.
I even co-led a citizens group that defeated the location of a corn ethanol plant right here in scenic Barrie.
Ironically, Valero (VLO), the oil refiner that bought most of Verasun's plants after it filed for Chapter 11, is shutting down ethanol plants due to bad economics.
Ethanol margins have gone really negative, because at $8 corn, a producer needs $2.86/gallon ethanol just to cover the feedstock cost, let alone overheads.
Chicago ethanol is trading in the $2.53-55 area. Of course, DDGS is a byproduct credit. But many ethanol producers are bleeding red ink at this point.
The Renewable Identification Numbers (RINs) the U.S. government requires so that refiners satisfy the RFS II are structured so that blenders can bank and use up inventory in the credits and reduce current production. A smoothing out effect.
One professor says the RIN's banked are currently to the tune of 2.4 billion gallons. (here)
Theoretically the excess RIN's could be used short-term to alleviate pressure on margins if corn prices make ethanol production even worse.
That's 857 million odd bushels of corn demand that would be freed up. However, I think that would cause a short-term drop n the corn price only.
Informa has reduced their estimate (to be released tomorrow) for the 2012 corn crop to 11.5 billion bushels, a full 3.3 billion less than the USDA's first estimate.
It should be noted that ethanol also acts as an oxygenate, which is a required additive to gasoline to make sure it burns properly.
Also, the whole blending, transportation and dispensing of retail gasoline is structured around E10.
It wouldn't be a slam dunk that reducing the RFS would reduce anything other than US ethanol exports.
We have been cautious of fertilizer stocks in anticipation this movement by the downstream users, such as the livestock producers which could gain momentum.
But we still think Rentech Nitrogen (RNF) is a buy here, because they are situated the farthest up the Mississippi River from any other producers.
CVR Partners (UAN) reported their Q2 results today and indicated that Mid Cornbelt benchmark nitrogen prices averaged a healthy $417 for UAN.
Both units go "ex" distribution tomorrow. RNF $1.17 and UAN $0.60. Therefore, you should trade out of them today if you are taxable as we are.
Our target on RNF is $35.75 and they report Q2 on August 10. We think they could increase 2012 guidance to $3.20 or so, up from $2.86.
If the record heat wave and drought continues and river water levels drop further, the Lower Mississippi will become harder to navigate.
Right now only one port is closed in Kentucky, and the lower Mississippi is being dredged in spots by the ACE to make barge traffic easier.
However, if water levels decline further (how ironic, last year the river was flooding), a difficulty in getting nitrogen to the corn belt from the Gulf via barge would reward Rentech with higher nitrogen prices in the fall.
The alternative routes would logically be the U.S. East Coast ports which could see more imports from the Middle East and The FSU.
The caveat is if the condition of some soils is permanently affected by the drought, no fertilizer would be required in the fall. You can't grow anything on dust.
Dahlman Rose, a boutique investment firm, downgraded PotashCorp (POT) and some other fertilizer stocks today, suggesting a corn ethanol use reduction could be the negative.
Not really and way too late on that one. But an announcement to waive part of the RFS II could present a buying opportunity for our favorite names.