It’s no secret that the relationship between industry and the U.S. Environmental Protection Agency (EPA) is a volatile one. For the many futures traders involved in the ag market, monitoring the impact that EPA policy has on sectoral performance is a necessity.
The U.S. as an Energy Producer
Following the unexpected win by Donald Trump in the 2016 presidential election, many viewed the EPA as a soon-to-be backseat driver in the U.S. economic tractor-trailer. Trump ran on promises of rolling back a wide range of EPA regulations, a good number of which involved energy production.
Energy is a driving force behind U.S. commerce. Its production and availability can impact the dynamic of a related ag market in many ways. For ag producers, two issues stemming from boosted North American energy output can play a major role in the marketing of goods, and in turn, futures pricing:
- Logistics: Transportation issues can quickly arise, making delivery of ag products to market a challenge. This phenomenon was observed during the North American shale boom of 2010–13, with crude oil dominating regional transportation infrastructure, specifically rail and roadways. The result was higher transport costs passed on to the producer, sending a ripple effect throughout the ag futures markets.
- Energy availability: One upside to increased American energy production is lower fuel costs for producers. Greater crude oil supplies typically lead to reduced futures valuations and lower prices at the pump. In theory, this effect can cut costs for many ag market producers, prompting reduced upside pressure being placed on assorted grain and oilseed futures.
A primary target for planned EPA rollbacks is the Clean Power Plan, adopted in 2015 under the National Clean Air Act. The EPA proposed a repeal of the Clean Power Plan in early 2018. If implemented, the repeal will remove restrictions designed to limit carbon emissions from coal-fired power plants. This effectively sets precedent for the increased extraction of domestic crude oil, natural gas, and coal resources.
Corn Futures, Ethanol, and E15
The Trump Administration has been extremely bullish on the wide scale integration of ethanol into U.S. fuel supplies. On October 9, 2018, President Trump went on the record suggesting that current EPA regulations limiting the use of ethanol would be reformed. Prohibition of gasoline blends containing 15% ethanol, known as E15, would be lifted via an EPA waiver in February 2019. According to Trump, this move would “unleash the power of E15 to fuel the U.S. all year long.”
While the long-term ramifications of lifting ethanol-related EPA requirements remain to be seen, the corn futures ag market reaction was immediate. Trump’s October 9 2018 speech in Council Bluffs, Iowa, proved to spark positive sentiment in both December 2018 and March 2019 CME Corn futures:
|Contract||Weekly Gains (Oct. 8)||Monthly Gains (Oct.)|
|December 2018||+5’2, +1.42%||+6’4, +1.82%|
|March 2019||+5’4, +1.45%||+7’2, +1.97%|
The impact on ag market participants was immediately evident. The possibility of existing EPA regulations being lifted would increase the role of ethanol as a fuel staple in the U.S. Fallout effectively increased the demand for corn, boosting futures pricing. Conversely, it contributed to a tough 2018 for soybean futures, stemming from tariffs and the U.S.-China trade standoff.
The possibility of widespread ethanol-fuel integration further weakened the outlook for soybeans. Following Trump’s Council Bluffs announcement, soybean futures lagged for the trading week of October 8 and for the month of October as a whole.
Projected future demand for corn due to the EPA ethanol rollback spiked projections for U.S. planted corn acreage in 2019. Survey data suggested U.S. farmers were in line to plant 90.8 million acres of corn in 2019, up 1.7 million year-over-year. These estimates also included soybean plantings for 2019 falling by more than 2 million acres, to 87.5 million.
Staying Abreast of Ag Market Opportunity
When politics and industry collide, the markets rarely go unaffected. EPA regulations are a prime example of this phenomenon, with competing ideologies regularly influencing how the environment and commerce are to coexist.
For timely information regarding the ever-evolving EPA-industry struggle, check out the DanielsAg mobile app. Staying up to date on how the EPA impacts futures can be a full-time job, but DanielsAg makes it routine.