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Corn+Soybean Digest

Ethanol Fuels Corn Market

Missouri grower Dale Samp says, “I'm not just a corn farmer. I'm also in the fuel business.”

When you think about it, that comment could apply to all corn producers. With nearly 80 U.S. ethanol plants producing more than 3.2 billion gallons of ethanol annually, that's well over 1 billion bushels of corn used for fuel production — not as feed for livestock or humans.

However, the tag applies more to growers farming near ethanol plants like Samp and other growers who belong to the Northeast Missouri Grain LLC in Macon, MO. The four-year-old plant has some 300 grower members. Samp serves on its board of directors.

“Every bushel of corn I sell goes across these scales,” says Samp, who used to sell his corn to a distant market about two hours away.

“This plant is only 15 miles from our farm. And along with the shorter distance to a market, the plant added 20¢ to our local corn basis. Our basis is now between even and 10¢ under,” he says.

The demand for Samp's corn and the corn of his neighboring growers increased dramatically when the plant opened in 2000. It requires 40,000 bu. of corn per day to run at full capacity. The plant has an annual production of some 36 million gallons of ethanol, not to mention co-products of dry distillers' grain (DDG) and carbon dioxide.

“About one third of the corn goes toward ethanol production, one third toward DDG and one third toward CO2,” says Matt Gerhold, the plant commodity manager.

Running 24/7, the plant eats up close to 14.6 million bushels of corn annually. If the supply starts running short, the price to growers can climb as easily as the price of gasoline did this summer.

“Ethanol as a whole has really helped the corn market,” says Samp. “Then when you get a plant nearby, it's even better. Anytime you get a new market it helps.”

Bid up the basis. Bob Wisner, Iowa State University grain marketing specialist, says the influx of ethanol plants will likely cause further tightening of the basis in various pockets of the Corn Belt.

“Ethanol is certainly changing the picture for both new and existing markets for corn,” he says. “Trainload shippers, terminal elevators and country elevators are going to have to bid up basis numbers.”

That will be especially true in regions where there are problems with the crop. “Those areas will see aggressive basis bidding by ethanol plants, livestock feeders and other large users,” says Wisner. “Growers with sufficient on-farm storage and semi-trucks will have better opportunities to deliver when prices are their highest.”

Wisner says northwest Iowa growers with access to several new ethanol plants have seen at least a 6¢/bu. increase in their basis. But even though ethanol plants create new marketing opportunities, growers should study contracts to deliver. “Watch for the time limits on the ethanol contracts,” he says.

They love it in L.A. A new market for more than 1.4 billion gallons of ethanol — equal to the nation's annual ethanol demand only six years ago — was added at the end of 2003 when California, New York and parts of New England shifted from MTBE (methyl tertiary-butyl ether, a petroleum-based additive) to ethanol for their renewable fuel sources, according to the Renewable Fuel Association (RFA), a trade group that represents ethanol producers and others in the industry, in Washington, D.C.

Bob Dinneen, president of RFA, notes that the huge increase in ethanol production “is becoming an integral part of rural economic development, air quality improvement and gasoline marketing.

“Ethanol has become the single most important and fastest growing value-added market for farmers, stimulating rural economic development, creating jobs and increasing farm income,” says Dinneen.

Once opponents of the ethanol industry, petroleum refiners are leaning on ethanol for the octane they require for gasoline blends. “We now count them as allies rather than adversaries,” he says.

Ethanol production saw an increase month after month earlier this year. Dinneen says ethanol use will expand the U.S. gasoline supply by more than 3.3 billion gallons this year, compared to ethanol production of 2.81 million gallons in 2003. Without ethanol, those $2-plus gasoline prices could have been 30¢/gal. higher.

In early summer there were 78 U.S. ethanol plants operating with the capacity to produce more than 3.2 billion gallons annually. Ten additional plants under construction will add more than 400 million gallons of annual production capacity.

States like Texas, where big oil has always had a major voice, are even looking at new ethanol plants. This will likely create some basis bid-ups in an area where feedyards, which finish more than 6 million cattle every year, already depend on unit trains for at least half of their corn needs.

The increased demand for ethanol will likely lure exports of the fuel from South America and other regions. There should still be plenty of marketing opportunities for American growers who have reasonable access to ethanol markets. The fact that competition will see more corn headed to the refinery and not the feed mill should help market prices.

Samp sees the potential for better corn prices created for growers everywhere they can have access to a new market. “When you can add an extra 10¢ or 20¢/bu. to your corn crop, that's great,” he says, adding that as a co-op member he keeps a closer eye on unleaded gasoline futures prices that can impact ethanol prices and ultimately corn markets.

Ethanol hedging could add another marketing tool to larger growers. The Chicago Board of Trade is looking at a corn-based ethanol futures contract, while the New York Board of Trade is examining a sugar-based ethanol contract.

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