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Corn+Soybean Digest

Distilled Gains: Ethanol's Top 10 Winners

An enormous expansion in the U.S. ethanol industry has helped to strengthen and invigorate America's heartland. Ethanol investors, cropland owners, row-crop farmers, rural communities and ag input suppliers have gained the most from this rapid boom in biofuels, according to industry experts. The nation has also benefited from increased ethanol production through less dependence on foreign oil, job creation at home and a cleaner overall environment.

Still, not everyone is helped by this dramatic demand boost in ethanol made from corn. The livestock sector will suffer the most in the short term, and consumers will have to pay slightly more for food. Unintended consequences could also result that would adversely affect the nation's grain industry, such as an increase in global competition and the potential loss of some U.S. corn, soybean and cotton markets abroad.

Despite the concerns, more enthusiasm surrounds U.S. agriculture now than in the last half century, says Chris Hurt, Purdue University Extension agricultural economist. “Other than the 1950s, there hasn't been another time when there's been as much investment in agriculture and in rural communities, except maybe the 1970s,” he says. “The 1970s were an inflation-driven boom that ended in a bust in the '80s. However, we've got a growing-demand market right now, which is the right time to invest. The wrong time to invest is in a time of inflation, which is what occurred in the 1970s.”

Owners of cropland and ethanol plants early last year are the biggest winners from this year's biofuels boom, says Hurt and other industry analysts. Yet these investors represent just the upper echelon of all who've gained from ethanol's mountainous profit proliferation, which extends to the majority of the ag industry, they point out. The following is a top-10 list of ethanol's biggest beneficiaries, gleaned from industry experts:

  1. 1. Cropland owners

    The surge in ethanol demand is boosting prices for corn and other competing crops, and those higher prices are reflected in higher cash rents, says Bruce Babcock, director of the Center for Agricultural and Rural Development at Iowa State University. “Long term, people who are the biggest winners are people who own the crop ground,” he says.

    Large-acreage cropland owners are the biggest winners, agrees Hurt. “Cash rents have been moving up rapidly and will likely continue to move up,” he says. “In addition, the prices for fertilizer and other crop inputs are bound to increase with more demand for corn acres. So from a farm tenant's point of view, the short-term gains from higher commodity prices will last only one or two years. Their gains will be short-lived as input costs go up. In comparison, the landowner's gains are more long term.”

  2. 2. Early ethanol investors

    Investments in ethanol plants are another big winner, particularly if they “put their money into ethanol plants that were up and running before November 2006,” says Daniel De La Torre Ugarte, associate director, Agricultural Policy and Analysis Center, University of Tennessee. “These production plants were able to catch corn at low prices and sell ethanol at high prices,” he explains.

    After December 2006, corn prices skyrocketed and stayed high while ethanol prices declined, pinching profit margins for ethanol plants. As a result, “the industy's losers were the ethanol plants that were just coming online from December 2006 through March 2007,” says De La Torre Ugarte. “However, they will likely be able to get over their initial challenges with corn prices now coming down again at the end of June.”

  3. 3. Corn growers

    “Corn farmers are big winners, particularly the corn growers who own a lot of their land or who crop share a lot of their land,” says Gary Schnitkey, University of Illinois Extension farm management specialist. “Those farmers who can grow corn more profitably than others, typically those in the traditional Corn Belt, will benefit the most from the higher prices generated by ethanol.”

    All corn farmers benefit from the ethanol boom, depending on how much corn they can produce, and how far away from ethanol plants they're located, agrees Jerry Fruin, University of Minnesota Extension economist. “Farmers who own land closest to the ethanol plants are the big winners, particularly if they also have investments in those plants.”

  4. 4. All row-crop farmers

    “All the crops that are land-intensive (cotton, wheat, soybeans and alfalfa, to some extent) will see some improvements in their general price levels along with corn as a result of increased ethanol use,” says Fruin. “So all field-crop farmers and landowners are winners.”

    Illinois' Schnitkey concurs. “Higher corn prices have helped all crop production prices to improve,” he says.

5. Rural communities

“Biofuels are bringing unprecedented investments into all kinds of agriculture, not just to corn and soybean production,” says Geoff Cooper, National Corn Growers Association (NCGA) director of ethanol and business development. “So you can definitely count rural economies as winners in this development. Ethanol plants will increase local tax revenues.”

Ethanol investors are clearly winners, and so are the communities in which they are based, agrees Hurt. “The ethanol industry is bringing with it huge investments in infrastructure, such as transportation, water lines and grain storage,” he says. “Although the job creation that occurs from ethanol production will be relatively modest, that's still a big help in small communities.”

Rising crop prices also help rural areas, points out Hurt. “The increase in the price of corn and soybeans will mostly benefit producers who live and spend their money in rural communities,” he says.

6. Agricultural input suppliers

With more value to protect in higher crop prices, there will be more demand for crop protection products, points out Hurt. “All agricultural input suppliers, from farm machinery to biotechnology, stand to benefit,” he says. “All the technologies that are most likely to increase corn yields will be winners.”

Higher commodity prices mean that farmers will have more money to spend and ag suppliers will be winners, agrees Fruin. “Corn requires more crop inputs than soybeans, and more money will be spent on fertilizer and higher-priced seed,” he says.

7. Livestock producers near ethanol plants

Beef and dairy producers near ethanol plants can feed large amounts of wet distiller's grains (a co-product of ethanol production) at a much lower cost than grain corn or dried distiller's grains (DDGs), says Fruin. “The cost to dry and transport DDGs can really add to the feed cost,” he points out. “So livestock producers who can feed distiller's grains wet have a clear advantage.”

8. Ethanol plants near livestock

The ethanol plants closest to large livestock feeding facilities will likely profit more than ethanol plants with no livestock feeding facilities nearby, says Michael Swanson, Wells Fargo & Co. ag economist. “DDG sales are a big part of an ethanol plant's revenue stream,” points out Swanson. “There is approximately 79¢ of DDG value in a bushel of corn, or about 12% of the total value of overall ethanol production. The per-bu. value of ethanol alone is about $5.90. For ethanol and DDGs together, it's $6.70.”

9. Grain storage facilities

Those with the capacity to hold the most grain after harvest were big winners this year and will likely be in the near future, says Fruin.

Many farmers sold corn too early last fall, agrees De La Torre Ugarte. “Farmers who stored their corn until November or December 2006 or January and February 2007 were big winners,” he says. “Too many farmers sold the majority of their corn earlier, at $2.20-2.60/bu. before the much higher prices that developed later.”

10. The western Corn Belt

The states with the most ethanol plants in operation before the ethanol boom are the big winners, says De La Torre Ugarte. Most of those are in the western Corn Belt, he adds.

According to NCGA, four of the top five states with the most ethanol production facilities are in the western Corn Belt (Iowa, Nebraska, South Dakota and Minnesota). Illinois, which ranks third in ethanol production facilities, is the only state east of the Mississippi River that ranks among the top five.

Ethanol investors in the western Corn Belt also tend to be more local compared to eastern Corn Belt investors, says Hurt. “In the western Corn Belt, there are a lot of farmers and local investors in the ethanol industry and a lot of that money will stay in the area as profits occur. In the eastern Corn Belt, there is more outside investment that benefits outside investors.”

Western Corn Belt farmers, farthest from river markets and food-grade wet mills, also benefit by ethanol's boost to the local basis price, says Cooper. “Farmers in areas where the basis has been fairly wide historically have now seen their basis narrow,” he says.

Where ethanol plants are located, they will strengthen the basis price, agrees Schnitkey. “For example, farmers in Nebraska, the Dakotas and western Iowa and Minnesota have historically had a weaker basis price compared to farmers in the eastern Corn Belt,” he says. “However, where ethanol plants have become established in those areas, the local price will go up closer to the national average.”

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