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Ethanol plants could need another billion bushels of corn after 2007

Will President Bush’s goal of increased energy independence for the United States set off a new kind of gold rush for U.S. farmers?

Even before the president announced his desire to substantially boost production of renewable fuels such as corn-based ethanol, USDA economists were forecasting the fledgling ethanol industry could need another 1 billion bushels of corn in 2007-08.

At a trend yield of 152 bushels per acre, economists said, a billion bushels would require an additional 6.5 million acres of the golden grain, half of which could be planted in the Mid-South this spring, judging from all the coffee shop talk.

For now, the market is signaling that growers should plant all they corn seed they can find. December 2007 corn futures have traded as high as $4 per bushel, or double what they were at this time last year. December 2007 cotton futures, in contrast, have remained relatively flat.

Some have predicted corn futures could climb to as high as $5 per bushel this spring, depending on oil prices and the U.S. economy. In any event, corn prices should stay up long enough to attract more acres for 2007, according to Keith Collins, USDA’s chief economist.

“The ratio of the November 2007 soybean futures price to the December 2007 corn futures price has been about 2 to 1, well below the August soybean-to-corn farm price ratio of 2.5 to 1,” said Collins, who was referring to the traditional benchmark for deciding whether to plant corn or soybeans.

“With market prices shifting in favor of planting corn at the expense of soybeans and other crops, a sharp increase is expected in corn acreage this spring,” he noted. “The prospective increase in corn acreage is already having ripple effects on agricultural markets.”

That includes higher soybean prices, which despite having high stocks levels at the start of the 2006-07 marketing season and record production, have increased in anticipation of reduced soybean planted area this spring.

After growing from 1.6 billion gallons in 2000 to an estimated 5 billion gallons in 2006, the U.S. ethanol industry appears poised to more than double its production – to 11.4 billion gallons – in 2008-09, Collins said.

According to Renewable Fuels Association data, the United States now has 110 ethanol plants with total capacity of 5.4 billion gallons with 73 ethanol plants under construction and another eight facilities expanding. The new total capacity of 11.4 billion gallons could be reached in 2008-09.

Based on current plant construction, consumption of corn for ethanol from the 2007 crop could rise by more than a billion bushels above the 2.15 billion the industry used from the 2006 corn crop, economists predict.

“For 2006-07, USDA forecasts the total use of corn will be the equivalent to the production on 85.6 million acres,” said Collins, testifying before the Senate Agriculture Committee. He noted that only 78.6 million acres were planted in 2006, leaving a potential gap of 7 million acres.

Corn supplies are expected to meet demand, initially, because of large carry-in stocks of corn, which could be reduced by more than half as more plants come on line or existing facilities expand.

“With corn stock levels already being reduced this year, another large draw down in stocks for the 2007-crop marketing year means corn will not be available to meet the rising demand, thus the higher corn prices that are signaling more planting. Beyond 2007, to achieve steady increases in ethanol production from corn will require even more acreage or higher corn yields.”

Higher yields?

Collins said ongoing research efforts by USDA and other institutions could boost corn yields even higher. “Research was the founding role for the USDA and has continued to be a fundamental function of the Department for nearly 160 years,” he said.

“Since 1948, corn yields have increased from 40 bushels to 160 bushels per acre (in 2004) due to fertilizers, better management, technology and improved crop genetics. It appears corn yields in the past couple of years have moved above the long-term trend and may continue to do so, helping to meet biofuel demand and reduce pressure on corn prices.”

Farming substantially more acres of corn raises issues about the possible environmental consequences of more nitrogen fertilizer use and the potential that more marginal lands may come into production having greater vulnerability to erosion, nutrient runoff and leaching.

“To meet the demand for biofuels, some corn acreage could return to production from land in the long-term Conservation Reserve Program as contracts mature, but that land may be environmentally sensitive and would need to be properly farmed,” he said. “Former CRP land may have lower yields and take some time before such land can be made suitable for crop production.”

It doesn’t take a USDA economist to figure out why the demand for ethanol has taken off, according to Collins. Those include higher oil prices, the 51-cent per gallon tax credit provided to blenders, low corn prices until last fall, the ethanol import duty of 54 cents per gallon, the Renewable Fuels Standard and the elimination of ethanol’s main oxygenate competitor, methyl tertiary butyl ether (MTBE).

“Ethanol production costs declined between 1980 and 1998 due to higher yields of ethanol per bushel of corn, lower enzyme costs and production automation, which lowered labor costs,” says Collins. “Energy input costs also fell during this period.”

From 1998 to 2002, the average cost of producing ethanol (excluding capital costs) remained at about 95 cents per gallon. Since 2002, the cost of producing ethanol has increased to about $1.45 per gallon due to increased energy costs and corn.

“Each $1 increase in the per bushel price of corn adds about 36 cents per gallon to the production cost of ethanol, assuming no change in the price of co-products and 24 cents per gallon assuming the price of co-products increase proportionally with the price of corn” said Collins. (Co-products would be distillers’ dry grain or DDG.)

“While corn prices have risen, the price of ethanol has been quite volatile. The Chicago futures price for January 2007 delivery fell from over $2.50 per gallon last June and July to about $1.70 in late September and then rose most recently to about $2.40, suggesting a fairly good return on average at the ethanol plant.”

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