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Corn+Soybean Digest

Ethanol: Winners And Losers

Landowners are the key winners from the current ethanol boom, according to a recent University of Minnesota symposium entitled “Biofuels: Economic Prospects and Environmental Implications.”

Ethanol production has boosted corn prices, which should boost Corn Belt land values by up to 66%, said Bruce Babcock, director of the Center for Agricultural and Rural Development (CARD) at Iowa State University. Where those landowners live determines whether rural communities benefit, added Steve Taff, professor and Extension economist in the Department of Applied Economics at the University of Minnesota. “Half of farm ground is rented in Minnesota, and if those landlords live in retirement homes in larger cities, the benefit does not accrue to small towns,” he said.

Consumers are neither winners nor losers from ethanol, Babcock concluded. “You won’t notice a drop in the amount of meat produced or in meat exports due to ethanol and its effect on corn prices. The food versus fuel debate is much ado about nothing. It adds $50/year per capita increase in American grocery bill. This is a 1.2% increase in the retail cost of food.”

One change wrought by ethanol is that crude oil prices drive ethanol prices, which in turn drive rural economies, Babcock said. CARD forecasts prices through 2016 of $52-55/barrel. An unexpected jump in crude oil prices would drive demand for more ethanol plants, Babcock said.

Ethanol plants that were built early have been profitable. Current returns over variable costs are about 60 cents/bu. of corn. Babcock projects the returns over all costs, including investment costs, to dip below zero in 2008 due to more plants coming online. As a result, it is not likely that more plants will be built thereafter.

By 2016, Babcock foresees 14 billion gallons of ethanol will be produced annually (all from corn). That would require 94 million acres of corn, creating an estimated corn price of $3.17/bu. corn in 2016, CARD forecasts.
That will result in an approximate acreage ratio in many areas of the U.S. of two acres corn to every acre of soybeans grown in the U.S. to fuel ethanol production, Babcock said.

The increased corn acreage required to produce ethanol will shift many U.S. soybean acres to South America. By 2016, the projected U.S. soybean acreage will be 69 million acres with a forecast price of $6.50/bu in 2016.
There will not be a viable cellulosic industry for 10 years due to technological hurdles and competition for acreage to grow cellulosic feedstocks. It would take an estimated $250/acre subsidy to divert corn acreage on high quality soil to cellulosic production, Babcock estimates.

Farm operators are neither winners nor losers from the ethanol boom, since their costs and revenues have both increased.

Much of ethanol’s economic future – and therefore rural landowners’ and rural communities’ future – rests on the future of government subsidies. “Land prices of $5,000/acre are perched on ethanol subsidies,” Taff said. He referred to a 51-cent/gal. blenders credit for adding ethanol to gasoline, and to a 54-cent import tariff that effectively makes cheaper Brazilian ethanol uncompetitive here.

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