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Corn+Soybean Digest

Corn For Ethanol, Changing The Dynamics Of Markets, Producers And Users

Increased ethanol demand in the U.S. will most likely put strains on the agricultural sector – from markets to the environment to crop production and food products. One Ohio State University agricultural economist suggests increasing expenditures on crop yield research to soften the blow of such impacts and keep the country internationally competitive.

"The idea is to build yield down the road so that we can accommodate food demand, fuel demand and the environment, while minimizing other potential suppliers coming in and taking our market share," says Carl Zulauf, professor in the Department of Agricultural, Environmental, and Development Economics.

Creating a win-win solution through increasing yield is Zulauf's way of encouraging others to recognize the direction the country is taking to become more energy independent, the pressures that it will create on the agricultural industry, and more importantly, that the change is long-term.

"We have made, as a nation, a generational policy decision in moving toward greater energy independence, and those types of decisions don't fade away. We change the way we think, act and organize ourselves when we make a generational policy decision," says Zulauf. "One component of energy independence is likely to be some form of renewable energy. It isn't clear yet what the mix of renewable energy will be, but at least in the short run you have to believe that corn-derived ethanol will be a component of meeting our desire for energy independence."

Using corn as an energy source is already changing the dynamics of markets, producers and users.

"The ethanol industry is growing so large and so fast that its demand is now outstripping the country's ability to supply that demand from historical increases in yields, which generally have been about 1.7% annually over the last 30 years," says Zulauf.

Several options are brought to the table as a result of trying to meet
that demand:

  • Increase the number of acres planted to corn. Growers are already responding with the highest acreage intended for planting since WWII.
  • Shift land from other uses into crop production. Potential candidates include pastureland, conservation reserve land and forests.
  • Import more ethanol. Because of import tariffs and a drive for energy independence, imports likely will have a limited role.
  • Ration corn demand in response to higher prices.
  • Increase yields.

"These adjustments, however, carry tradeoffs. If you ration demand, you will reduce the size of the U.S. livestock sector, the U.S. bioenergy sector, exports of crops or all three. If you bring additional land into production, you raise environmental concerns," says Zulauf. "The option that has the most likelihood of giving us the most positives is to increase the expenditures on yield research."

Investing in yield research is not only designed to produce enough for both new and existing corn users, but is a way of avoiding a potentially smaller U.S. role in the global market.

"If we don't invest more in yield research, we could be setting ourselves up for a similar situation that happened with soybeans. In the early 1970s we had a big run-up in soybean prices. What that did is send all kinds of economic incentives to farmers around the world to produce soybeans. The U.S. did not really ramp up its research on soybeans, and now Brazil and Argentina combined produce more soybeans than the U.S.," says Zulauf. "I'm concerned the same thing can happen with corn. At $4 a bushel, we are not only going to produce more corn in this country, we are also going to stimulate production of corn around the world. We could end up seeing our international comparative advantage sharply decline if we don't step up our research practices."

Zulauf says, from a historical perspective, yield research on crops has resulted in substantially higher yields, specifically with corn. Between 1926 and 2006, the U.S. average corn yield increased from 26 bu./acre to 149 bu./acre, an increase of 473%.

Both the private and public sectors need to spend more on yield research,
says Zulauf.

"The high price of corn and other crops will stimulate private sector research. But, you also need to increase public sector research," says Zulauf. "Private firms tend to underinvest in basic research because it is so risky. Thus, investing in basic research by the public is critical for long-term, continuing yield increase and thus to maintaining the comparative advantage of the U.S. farm sector."

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