Look before you leap in 2016

Use your head, not your heart, when making decisions in the coming year, writes Donna Funk. This column appears in the January issue of EPM.
By Donna Funk | December 17, 2015

If someone tells you exactly what will happen in the ethanol industry in 2016, be warned: They might have oceanfront property in Arizona. I’m not going to make any predictions. I just want you to be prepared.

Why You Plan
Many operators built up nice cash reserves in the past few years and plowed them right back into expansion and acquisition. Others took a more cautious approach. What should you do?

My advice is to use your head, not your heart. Every decision you make has an enormous impact on your business and your shareholders down the road. Every bushel of grain procured, every gallon of fuel sold makes a difference.

Plan for a range of scenarios. You don’t want to deplete your cash and get stuck where you can’t expand as markets strengthen. But if you expend your resources too rapidly, you might have too little cash in an extended  soft market or when other opportunities with better paybacks present themselves.

What to Expect
Experts expect input prices and demand to remain volatile. The good news is that many think feedstock prices will remain weak while global economic recovery will boost demand for fuel.

Here are some of the questions our clients are asking as we head into 2016.

Q:  How far out should I think about booking delivery of feedstock?

A: Chicago Board of Trade corn futures for March delivery recently hit a contract low of $3.645, down from $4.60 in July. USDA revised exports and total corn use down in its most recent supply and demand projection for 2015-’16. Consider buying in smaller chunks to take advantage of potential lower prices. You can buy an option, purchase larger amounts or book farther out if prices start to climb.

Q: What is the outlook for petroleum prices?

A:  Economists tell us petroleum prices are strongly tied to demand; meaning economic growth in Asia, Europe and the U.S. is the biggest driver of prices. Pay close attention to economic indicators such as construction, wage growth and durable goods sales. Weak numbers in these areas put pressure on oil prices.

How to React   
Continued weakness in commodity prices and upside in petroleum demand paint a rosy picture. That might be the case, but given the uncertainty of an interconnected global economy, here is a three-pronged approach to consider.

1. Be cautious in feedstock bookings to take advantage of likely weakness in grain markets and avoid too much inventory. Keep a close eye on your cash position.

2. Plan for an uptick in petroleum prices and demand, and take a measured approach. Be cautious about selling forward into a bull market.

3. Talk to your financial consultant and have all your ducks in a row so you are ready to expand when you get clear market signals. Look before you leap.

Author: Donna Funk, CPA
Principal, K-Coe Isom