Saturday, December 20, 2008

Building my Deep Think Future™: Dot #1...

As is customary for me this time of year, I take occasional breaks from eating Christmas cookies to ponder the future of our farm, and strengthen the rum-eggnog ratio. This year is more fun than usual since we have stumbled into a world where assumptions seemingly have no bounds and imagination cannot find many constraints which have not already been breached.

What follows are some items that comprise my background for aiming my future plans. They may seem wildly disconnected, but we have learned from recent brain research that's one thing our brains do well - connect seemingly unrelated dots.

Dot 1: The Energy Environment

Consider these slides from the DOE EIA Annual Energy Outlook 2009:

From the summary you don't get the real sense of the scope of the change of outlook.  But in the following charts observe the difference between the 2008 forecasts and the 2009.

 While I don't fault them, one glance at the next chart says to me: We have no idea what oil prices could be.

However, between curtailed demand and biofuels, there is good news for those who despise importing oil.  Note however, that this chart does not suggest where the imports will come from - a point frequently lost in the jingoistic oversimplified view of oil coming only from the Mideast.

Whether I like it or not, and to the deep concerns of the meat/dairy industries it looks like biofuels are being woven into a "given" for our energy future, despite the funky science and economics underlying them. As this perception of acceptance spreads via seemingly disinterested parties like EIA, political will to subsidize and grow the ethanol industry solidifies.

And as I have long believed, cellulosic biofuels will continue to disappoint.  Inference: higher mandates for corn use will be accepted with decreasing resistance.

For the first time, energy demand is being seen as responsive to costs.  My take: energy suppliers will be in fierce battle for market share. Oil companies may decide it's better to own some ethanol production than fight the farm lobby.

Some wild conjectures:
  • Suppose BP buys Verasun. For that matter, suppose Mobil buys ADM. From the point of view of who has money and who is grossly undervalued in the market, it's not unthinkable.  Oil companies would thus participate in the only growing domestic supplier share. I think it could be one of the best outcomes for this market, and would certainly blow some farmer minds to depend on an oil company for their corn check.  It would also quiet farmer "Big Oil" rants, at least in 100-mile circles around ethanol plants.
  • Since we have been stunned by the first drop in electricity consumption EVER in the US, what if saving energy becomes a fad that escapes the greenies to the general public? Now add in GHG emission rules that make this shift in thinking even more favorable.  I think the demand changes in this presentation will be expanded in future forecasts. At that point energy suppliers will really love market share protection afforded by mandates, ergo more fuel for the ethanol industry.
  • With domestic NG production rising, domestic NH3 production looks better and better. (We'll look at production issues at a later time).
  • Could some serious money be made here at N 2100th Street by betting on a change in energy usage and production, not to mention energy politcs? Seems like it to me.  at the very least, some serious competitive prressures could be pre-empted.
  • While the biofuel industry is busy fending off critics (like me) a case can be made that succeeding beyond their wildest imagination could be the more ominous outcome. If biofuels grow to the extent projected here, the slam-dunk nature of their quasi-governmental status will be a commodity of great value in the market. And this value could be apparent far earlier than the recovery of confidence in the general equity markets.  Like the flood of government-backed debt in the market, I think government-mandated equity, such as ethanol plants represent will be golden.  This could happen overnight as part of the infrastructure stimulus and energy plans of the new administration. I think some combination of these effects is very likely.
  • Can grain merchandisers like Cargill, who have largely avoided the ethanol business to prevent conflict with their feed/food customers end up big losers? Oh, yeah. 
 Piling guesses on conjectures is a silly business, but in the process of dreaming we prepare our imaginations for clues, which if they occur, speed our responses.  At the least, I know which indicators I will be watching next year.

Again, I may not be crazy about my predictions, but I do have to compete in a world where they might come true.

Of course, this could all be the eggnog talking.

[John's World: All Posts]

1 comment:

Ol James said...

Mr. Gruenspecht has a "speculative" outlook, from the figures these charts are based on. Some of the biggest rises,(according to the fact sheets), will be in the Industrial sector. Jet fuel, electricity consumption being a couple of the biggest. Which leads me to think that CEO's will be traveling and getting those enormous bonuses.
With his background in economics I have to believe he is invested heavily in speculative energy contracts.
But only The Good Lord knows what will happen, all we can do is watch how it unfolds.