CHS : Navigating the Geopolitical Landscape

This article is reprinted from the March/April 2022 print issue of Grain Journal and includes excerpts from the March 14, 2022, keynote address at the 2022 National Grain and Feed Association (NGFA) convention in Charleston, S.C., delivered by Jay Debertin, president and CEO of CHS.

Unrest in Ukraine

At CHS, we have three big platforms - fertilizer, energy, and grain, and all are affected by Russia's invasion of Ukraine. Currently, Russia produces 11% of the world's fertilizer, 10% of global wheat exports, produces 10-12% of the world's oil supply, and 30% of the natural gas.

What's hard to wrap our minds around is the number of people around the world who are living on $20 a day. When the food supply is interrupted, and energy prices are as high as they are, it's hard for us to get our heads around that, because we don't live that way.

It's difficult to see how the events in Ukraine will play out. Just weeks ago, you had a country of 41 million people sleeping in their beds in a house much like ours. They went to work the next day to jobs that looked a lot like ours. Now all of this is upended.

How does that get put back together? When does it get put back together? And frankly, will it ever get put back together? People around the world depend on exports from the Black Sea and ports like Odessa, which is significantly shut off. When does it start up? How could it start up? What kind of crop gets planted and harvested in those areas that the world's supply and demand sheets depend on?

For spring of this year, however, the fertilizer supply for most places in the United States is ready to go. It's either on the water, in bins, and with the exception of some fringe areas, it's ready or has been applied and in pretty good condition.

For summer and fall, we're operating in a market with no offer, and it's hard to see how that gets put back together. Fertilizer from a country like Russia is going to come to the top of the table. While the United States does not buy a lot of oil from Russia, the fact is, Russian fertilizer is part of the supply chain for this country and for many countries.

It's hard to see how the sanctions on Russia necessarily get put back in the bottle soon. Can anyone really imagine Russian President Vladimir Putin on a world stage with other global leaders? The world is out of practice in dealing with these kinds of global issues. We haven't dealt with those since 1945.

Renewable Fuels

The ethanol and renewable diesel business appears to have a solid future. If you have a high-cost plant or are in a strategically poor location, that's not a great place to do business. But if you have a good plant and run it well, it's going to work out as a good processing type of business.

The new addition to the renewable fuel space is renewable diesel. We've always had something called biodiesel, which is taking soybean oil and putting it on top of diesel fuel and blending it.

Renewable diesel is something different. It's taking soybean oil into a refinery, treating it as crude oil - it goes through the entire refining process, and it comes out as diesel fuel. That business has really exploded due to tax breaks in a few states. It's going to be interesting to see if those states know how much product is coming their way. I hope that taxpayers know how much product is coming their way, because it's all being driven by a tax break. The day-to-day economics can't support it. If you put soybean oil at 71 cents a pound, even when crude oil costs $110 a barrel, it doesn't work.

The only way it works is with tax breaks. Renewable diesel is going to be in the hands of really solid companies that can run the business. We're going to build crush capacity. For CHS, the areas of opportunity are in the north and west. We've seen soy crush plants announced up in North Dakota by good companies that I know will build them and run them well. For the farmer, it's a good move.

But it's also going to mean a lot of change within the crush business, and it's going to create a lot of feed looking for animals. Those of us who are in the ethanol business making byproducts moving into the animal stream, we're going to have a competitor. That's going to be really challenging going forward.

I think a lot of that meal initially is going to go to the nearest home for it, before it goes on a ship. It's going to take a lot of hard work to find as many markets for the feed byproducts as we did before. One aspect about this that hasn't made the front pages yet, and I don't know that it will, is the debate about food vs. fuel. For a window of time, as the corn ethanol industry developed, was a food vs. fuel debate. It went away, because there was plenty of corn, and it didn't affect the price of cornflakes. It really didn't hit the consumer.

It's going to be interesting to see what happens now with the food vs. fuel debate. People in our industry know about it, but the consumer doesn't know much about soybean oil going into diesel fuel. If we see the numbers we all see today, with the demands that are there, where will the raw material come from? What kind of changes to the cracking process does that call for? And how does agriculture work through that?

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