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Economist paints positive picture for grain markets

Joe Outlaw hated to do it, said it would tarnish his reputation as an agricultural economist and that the universities that awarded his degrees might rescind them, but the facts spoke for themselves.

So Outlaw, Texas A&M professor and Extension economist, had no recourse but to deliver a positive report on grain market outlooks at a recent renewable fuels conference in Belton, Texas.

“It pains me, as an economist, to be positive about stuff,” Outlaw said, tongue in cheek. “But the corn and grain markets should be good.”

He said the recent spike in corn and other grain prices will not flare and fade as was the case in 1995, following passage of the Freedom to Farm Act. “That movement was trade-related,” he said. “This is a different market. Unless something happens with policy, it should continue.”

Outlaw hedged only a little when he said prices could recede some. “But $2 corn is not in anyone's crystal ball. We might see $2.50 but more likely (no lower than)$3. This is a deficit market.”

That price surge comes from ethanol, Outlaw said. “A year ago corn was trading at $2 a bushel. Now, it's at $4. Companies are still making money with ethanol with gasoline prices above $2 a gallon.”

A 51 cents per gallon ethanol tax credit helps profit margins. Bio-diesel gets a $1 per gallon incentive but demand falls way short of ethanol. Consequently, soybean acreage may slide this year as farmers opt for corn to meet the demand for ethanol.

The president's comments about renewable fuels in the recent State of the Union Address also encourage interest in ethanol. Outlaw said President Bush's recommendation for a 20 percent reduction in gasoline usage in ten years likely will be a starting place. “We'll see a lot of one-upsmanship on this issue,” he said “The president's proposal will be the minimum.”

He said legislators have already introduced bills that call for even less dependence on fossil fuels. One such proposal calls for 60 billion gallons of ethanol production by 2030.

Outlaw said legislators will include aggressive proposals for renewable fuel production in the next farm bill.

“We may see a floor on oil prices. Senator Richard Lugar, R-Ind., wants a floor no lower than $45 a barrel. At $45 I feel comfortable with prospects for renewable fuels,” Outlaw said.

Consequently, the market price for corn should remain significantly above the target price out to 2011. The same appears likely for soybeans, grain sorghum and wheat.

The current surge in ethanol production will slow some Outlaw said. “Production doubled from 2001 to 2005. It will double again by 2008 before it slows. Prices also will edge downward. Outlaw said ethanol price in 2006 hit $2.50 a gallon. Price could drop to $2.09 in 2007 and $1.63 by 2015.

“Ethanol provides only two-thirds the energy of gasoline, so it will be priced accordingly,” he said. “Returns will decline for ethanol plants.”

Outlaw said plants coming on line face a $1.75 per gallon cost to build. Price for feedstock adds to production costs. “With the 51 cent incentive, it's still profitable.”

Outlaw said the likely switch from soybeans to corn, primarily in the Midwest, will hurt bio-diesel production.”

Soybean oil prices will increase. “That's the number one product for bio-diesel,” Outlaw said. “Soybean oil is the lowest priced oil now. If it's higher than 30 cents a gallon it's hard to make money from bio-diesel. Without the subsidy, bio-diesel plants would be losing money.”

Outlaw said demand for ethanol will be in the billions of gallons per year. Demand for bio-diesel is not up to one billion gallons yet.

He said prospects for renewable fuel production is good for Texas. “To make it work, though, we need more feedstock. “I think the next farm bill will include more incentives for ethanol production, especially for cellulosic production (which uses bio-mass including corn stover, wheat straw, and other crop residues).”

Outlaw and others voiced concern about the effect high grain prices will have on the U.S. cattle industry. High prices also affect poultry, swine and other livestock operations.

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