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Corn+Soybean Digest

Feeding Ethanol Demand

Gene Youngquist receives up to 10¢/bu. more than other markets in his area pay by shipping corn to the Big River Resources, LLC, ethanol plant in West Burlington, IA. “It varies. Sometimes the plant pays just 3-5¢/bu. At other times it's as much as 10¢,” the Cameron, IL, corn and soybean grower says.

The near doubling of ethanol plant capacity called for under the new energy bill — to 7.5 billion gallons by 2012 — means that more farmers have the alternative of selling their corn at higher prices. Ethanol plants not only are boosting overall demand and tightening basis, most ethanol plants have little storage, thus have to buy corn on a daily basis and pay whatever it takes to get it.

At harvest, premiums may be very small or nonexistent, but during spring and summer premiums can be substantial, as high as 20¢/bu. at some plants, says Ed Usset, economist at the University of Minnesota.

At the extreme, some plants have had to pay premiums up to 35¢/bu. over what country elevators pay to keep their plants running at full capacity. But such premiums may only be available for a few hours and in inclement weather on holidays when farmers would like to be home with their families, says Carl Johnson, Eagle Grove, IA, farmer and a director on the Iowa Corn Promotion Board. The plant closest to Johnson generally pays a “slight premium” of 3-7¢/bu.

At Vera Sun Energy, with ethanol plants in Aurora, SD, and Ft. Dodge, IA, “95% of the time we have to pay 5-10¢ in premiums to get the corn,” says Jack Nelson, the firm's commodity program manager. Corn prices near the Aurora plant used to be some of the lowest in the country, but no more, Nelson says. There are now eight ethanol plants within a 60-mile radius, which has tightened basis considerably. Nelson estimates that the plants have raised corn prices overall by 20¢/bu. annually.

Iowa State University economist Bob Wisner says that premiums near Vera Sun's Ft. Dodge plant may change when new plants in the area become operational. Corn will need to be imported into Webster County, where Ft. Dodge is located, to supply the county's ethanol plants and local feed needs, and prices will need to be high enough to attract corn from a wider distance.

“Within three to four years I expect corn bids at these plants to be high enough to shift acres out of soybeans to corn, but that will take some time and strong corn bids,” Wisner says.

Floyd, IA, producer Pam Johnson says she receives about 10¢/bu. more for the corn she ships to the EXOL ethanol plant near Albert Lea, MN, because the plant has raised basis in the area due to stronger demand for corn. In her view, the real advantage of selling to an ethanol plant is not the modest premium she receives from time to time, but by being an investor and obtaining dividends that at times have been more than $1/bu. for each share of investment.

Ken Greene, who farms near Freeport, IL, initially saw a deduction in his corn price on what he shipped as a member to Adkins Energy, LLC, Lena, IL, because of an initial design flaw in the co-op ethanol plant. The agreement between Adkins and producer investors was that any plant losses would be made up through lowering the corn price. Greene admits that was hard to take, but since then plant profitability has created both premiums and dividends that have more than made up for the initial loss. The plant “has raised the basis for everyone” by about 8¢/bu., so prices are equal to those on the Mississippi River, he says.

One change for Greene in selling to an ethanol plant is that he no longer “sweeps the bin out in June like I have in the past, because I have made a commitment.” While his overall experience has been positive, Greene says there are bound to be some consolidations and bankruptcies along the way as the ethanol industry develops.

Carl Johnson agrees that investing in an ethanol plant is not risk free, thus the dividends some producers have received could end. He says there could come a day when $4 corn and high-priced natural gas forces plants to shut down to avoid operating at a loss. In addition, Johnson says many of the new investors in ethanol plants are “big money people, the Donald Trumps of the world,” and at some point, “there will be too many plants built.” He notes that in most industries such as grain and oil, there are only 20 or 30 individual companies, and in ethanol today there are more than 120 individual firms, which to him means there will likely be consolidation.

In the view of Primghar, IA, producer Daryl Haack, the break-even point for shipping to an ethanol plant vs. the local elevator is about 30 miles. He's about that distance from three different ethanol plants, and the economics aren't quite there to sell corn to them, particularly since he doesn't have his own truck. “But I get the benefit of ethanol plants, even though I don't ship to them, in higher corn prices,” he says.

Wisner says another real benefit that goes beyond actual premiums paid by ethanol plants to farmers is that elevators will be forced to increase their bids to farmers when the export market tightens up. He adds, however, that because of the fermentation process, plants will only accept high-quality corn, and not corn high in aflatoxin.

Rob Elliott, who works with Monsanto's Processor Preferred program from Illinois, says that a couple of plants are currently paying a premium for corn with high-fermentable starch that boosts ethanol yield, but in the next year he believes four to five plants may pay about a 5¢/bu. premium on such corn. Using near-infrared technology, Monsanto is working with about 40 ethanol plants on how to identify corn with high-fermentable starch. At present, seed companies are focusing on identifying existing hybrids with high-fermentable starch most desired by ethanol plants, Elliott says.

Pioneer Hi-Bred International markets hybrids it has categorized as high total fermentable that show higher levels of ethanol yield. A spokesperson says the next wave will be grain from hybrids developed with transgenic traits, through molecular breeding or other biotech techniques that carry a significantly higher ethanol yield.

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