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Corn+Soybean Digest

Bet The Farm On Biofuels?

John Moreton beams over the future of prices he'll receive for his corn, and even soybeans, in the next few years.

His bigger-than-bullish attitude is fueled by the mammoth growth in ethanol and biodiesel production.

The Wyatt, MO, producer is among many growers who should cash in on an ethanol industry that has grown from about 900 million gallons of fuel production in 1990 to more than 4 billion this year.

Since it requires .37 bu. of corn to produce 1 gal. of ethanol, that equals well over 15% of the nation's near 11-billion-bushel corn crop. That fuel production comes from some 100 ethanol plants in 21 states, according to the Renewable Fuels Association (RFA). And with 30 more new plants under construction and some 150 on the drawing board at any given time, the potential demand for corn can't be met with what's grown today.

And that doesn't even consider livestock entities that have long been the nation's biggest markets for corn production.

“I'm excited about marketing in the next few years,” says Moreton, who farms a few minutes from where a new ethanol plant is in the works at Sikeston, MO. “The ethanol thing is really taking off. They are predicting this year that we're going to use more corn than we'll produce.”

Moreton is already astute in selling his corn, which is part of a soybean/wheat rotation. “We double-crop soybeans after wheat,” he says.

For 2006 corn, he got close to $2.60/bu. booked through futures and options in mid-2005, based on strong December 2006 futures prices seen last year. His strong local basis at 10¢-under to an even basis provided that price, along with premiums for early delivery.

“We can usually deliver corn in September,” he says, “and hope the premiums available for then continue. And since the 2007 markets were high (in May and early June of this year), we were able to get some $3-plus corn locked in for '07.

“I think the expected demand for corn with biofuel expansion is one reason. That's great for corn farmers,” Moreton says.

Corn Belt Extension economists agree, based on the expected increase in demand for more ethanol-fueling corn. That could reach 500-600 million more bushels for each of the next two years, or the need for an additional 3.5-4 million acres per year, says Bob Wisner, Iowa State University Extension economist.

“There needs to be a price incentive for growers to plant more corn acres to meet the greater demand,” Wisner adds.

“We will have to take prices 10-15% higher to get that many more acres,” adds Bill Bullard, grain marketing consultant for Hurley & Associates, Charleston, MO

Bullard, whose commodity consulting/brokerage works with Moreton and has offices in over 25 locations nationwide, sees a better futures market, as well as cash markets at elevators and feedyards, not to mention ethanol plants. Basis levels should also be helped, but not necessarily at harvesttime early on.

“A big part of that increase (in production) will have to move at harvesttime because there may not be enough storage for it,” says Bullard. “So we may not see as good of a basis level at harvest. It could put even more pressure on basis because more volume has to be moved at that time.”

Purdue University's Chris Hurt says that once the glut of '04 and '05 corn is worked through this year, price increases should be imminent. “We anticipate that corn basis will have a remarkable turnaround from the bad basis seen this summer,” he says. “A 35¢-under basis in parts of Indiana could turn to a positive basis in the spring of '07.

Of the ethanol plants in operation now, close to 40% are part of farmer-owned co-ops. RFA data shows Archer Daniels Midland (ADM), long-time ethanol producer, as the largest producer, with at least seven plants online with the capacity to produce more than 1 billion gallons of fuel annually.

The expansion in ethanol production is due mainly to the increase in gas and oil prices, as well as the requirements for better environmental standards in government clean air laws. In addition, the federal government is mandating movement to 7.5 billion gallons of renewable fuels. And a number of states have their own requirements and tax incentives to encourage more biofuel production.

Some argue that if the consumer-choking $70/barrel-range oil prices and resulting $2.50-3.00/gal. gasoline and diesel prices are dramatically reduced, ethanol production would dry up.

Not so, says the RFA and many others. With the enormous world demand for fuels for exploding market-oriented economies in countries from China on down, oil and gas producers will have trouble keeping up. The refining capacity isn't there.

The biofuels industry is seeing the most aggressive refining capacity increases. And with (early summer) ethanol prices in the $3.50/gal. range, they aren't that concerned about corn prices that approach $3/bu.

According to the RFA, the price of corn has very little to do with the price of ethanol. Low corn prices do not always indicate low ethanol prices and high corn prices do not always lead to high ethanol prices.

At prices in the $3.50/gal. range, some report that ethanol companies could pay $7/bu. for corn and still make profits.

“The greatest effect on the price of ethanol is the supply and demand for ethanol in specific markets,” says RFA's Matt Hartwig. “As MTBE is phased out due to its threat to groundwater quality, the demand for ethanol has increased.”

Don't expect $7-corn, say Wisner and Hurt. But with the huge demand for more biofuels production, the days of $1.50 corn could soon be history.

Wisner stresses that the biofuels boom could have an astounding impact on where corn is sold. Iowa alone has more than 25 new plants either under construction or in the planning stages. Many are from farmer-owned co-ops, although recently planned plants are drawing in outside investors.

“If you look at all of the plants in Iowa and those under construction or planned, they would use the yearly Iowa production in a year (2.1-2.2 billion bushels),” he says. “That tells me that the market will improve.”

What about that corn needed to feed livestock? That represents more than 60% of the market for corn. With biofuel demands, that number may be shifting as fast as the $20 fill-up. “Dry and wet distillers' grain can replace a substantial amount of corn in cattle feeding and dairy production,” says Wisner, “so beef cattle and dairies can adjust the most to the ethanol industry.”

But it won't happen overnight. If supply and demand theories are correct, these entities will likely pay more for grain.

“The amount of premiums that will be paid for corn is hard to say,” says Wisner. “In central Iowa, we typically see 7-10¢ higher prices at ethanol plants (compared to local elevator bids). We have seen a 12-20¢ higher price.

“But the big impact will be two to four years down the road when more plants come on stream,”he says.

As for biodiesel, Moreton is singing the same tune as another supporter, Willie Nelson: “It's been a long time coming.”

Moreton recently completed his term on the Missouri Soybean Merchandising Council. “In 1991 our group did one of the first studies of producing biodiesel from soybeans,” he says. “It was after a group of University of Missouri professors went to Europe and saw they were converting soybean oil into diesel. They came back and got a grant from the Missouri Soybean Council to start research.”

Biodiesel production, whether it's B5, or 5% biodiesel and 95% diesel, or B20, with the same percentage breakdown, is growing dramatically. National capacity could reach 500-800 million gallons in the next 18 months, says Grant Kimberley, market development manager at the Iowa Soybean Association.

“I wouldn't be surprised if our national biodiesel production is up to 1 billion gallons in the next few years,” he says.

“What's being built is larger than what's in operation now,” says Moreton. “That has to be good for farmers.”

With that greater demand for soybeans and the ethanol industry's demand need for more corn, growers who can deliver quality crops on time should have greater profit opportunities. Could it be that acre wars between corn-, soybean- and other crop-consuming biofuel plants and livestock entities are over the horizon?

Don't bet the farm against it.

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