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But corn acreage falling: Ethanol use continues to rise in U.S.

U.S. corn growers are counting on more U.S. motorists to put a new tiger in their tank in 2006 and 2007, but the same factors that are increasing the demand for the tiger — ethanol — could also lead to lower corn acres.

USDA is projecting that corn use for ethanol will increase by 550 million bushels or 34 percent in the 2006-07 corn marketing year as oil distributors substitute renewable fuels for the more expensive petroleum-based kind.

“There are indications that the massive gains in corn used for ethanol in the last few years will be even larger in 2006 as more plants are built and the high price of ethanol keeps margins positive,” said Ed Allen, international grains analyst with USDA's Economic Research Service.

“Many refineries and fuel blenders are planning to completely end the use of MTBE, a major alternative octane enhancer to ethanol by the end of 2006, due to liability issues.”

Allen presented the Grain and Oilseeds Outlook for USDA's Wheat, Feed Grains and Oilseeds Interagency Commodity Estimates Committees at the annual Agricultural Outlook Forum in Arlington, Va.

The same factors that are pushing demand for ethanol — higher petroleum and natural gas prices — are also leading some growers to consider reducing their acreage of the crop this spring, according to Allen.

“Planting conditions for corn were exceptionally good in 2005, so a return to average planting conditions is likely to contribute to reduced corn acreage,” he said. “Even with higher prices for corn and lower prices for soybeans, higher energy costs will contribute to lower corn area.

“Corn production costs are expected to rise with higher fuel, fertilizer and drying costs, but these expenses are less important for soybeans.”

Allen acknowledged that concerns remain about Asian soybean rust in 2006, “but the potential for a widespread outbreak in the Midwest seems largely abated after the disease failed to present a serious threat in 2005.”

USDA's preliminary estimate (the official estimate will not be released until May 12) puts the 2006 corn planted acreage at 80.5 million, down 1.3 million acres from 2005. Harvested acreage is forecast at 73.2 million or nearly 2 million acres below last year's.

“In recent years, large government payments have boosted corn returns, providing incentives to plant corn,” Allen said. “Loan deficiency payments are record large in 2005 but are expected to decline in 2006 with a smaller crop and increased market price.”

The Agriculture Department's 2006 yield projection of 147.7 bushels, which is based on trend yields, is slightly lower than the estimated 2005 national yield average of 147.9 bushels per acre.

The economists predict production will be down 300 million bushels to 10.8 billion, but the 2006 crop is still expected to be the third highest ever. The 2006-07 corn supply could be about unchanged even with lower production.

Carry-in stocks are forecast up 300 million bushels to 2.4 billion, the largest since 1988-89. The increased stocks will nearly offset the reduced production, leaving 2006-07 corn supplies nearly unchanged at 13.2 billion bushels.

Exports could be one of the bright spots for the corn market in 2006-07 with USDA projecting an increase of 150 million bushels to 2 billion bushels in the marketing year beginning May 1.

“Corn use over the last several years has been dominated by gains in domestic use, led by sharp hikes in ethanol, while exports have been relatively flat,” said Allen. “Early indicators for 2006-07 point to notable gains for exports and ethanol. Feed and residual use will remain the largest single component of corn disappearance.”

USDA analysts expect global import demand to increase slowly in 2006-07 with most of the growth in developing countries.

“Reduced competition, especially from Argentina, is expected to boost market share,” says Allen. “Argentina has planted much less corn for the current crop and conditions during reproduction were too hot and dry in some regions, so a dramatic drop in production is expected.”

U.S. corn exports in the latter half of 2005-06 and the first half of 2006-07 will face much less competition than a year earlier when Argentina was marketing a record corn crop. South Africa's production is also down because of sharply reduced area, which will limit future exports.

“Brazil's corn exports are expected to increase from the low levels of 2004-05 and 2005-06, but remain much lower than in 2002-03 and 2003-04,” he said. “China remains a source of uncertainty, as a small decline in corn exports is projected, but continued large subsidized exports are expected.

“China's long-awaited switch from net corn exporter to net importer does not appear likely to occur in 2006, following two very large corn crops. However, continued gains in domestic use and falling stocks means that China's exports will eventually decline.”

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