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Analysts Differ on Corn and Ethanol Projections

Many call USDA's baseline projections for ethanol production conservative, but others are inclined to agree.

USDA's predictions of corn use for ethanol and corn prices have been met with some acceptance and plenty of criticism. The most common criticism is that USDA's baseline projections are too conservative, but some analysts think USDA's predictions are well-informed.

The current level of U.S. ethanol production requires 2.15 billion bushels of corn annually, and the number of ethanol biorefineries in the U.S. currently stand at 111, plus 78 more under construction and seven undergoing expansion. USDA has estimated that 3.7 billion bushels of corn will go into ethanol production by 2008-09 and 4.0 billion bushels in 2010-1.

Analytical firm Credit Suisse says that USDA's estimation for corn use predict about 9.3 billion gallons of ethanol production by 2008-09, while the Renewable Fuels Association expects ethanol production to expand to 11.4 billion gallons by mid-2009. Credit Suisse also says in a research report issued last week that USDA is being "overly conservative" with its estimates on corn prices, which could move "well above $4.00/bushel in the event of supply or export demand shocks."

The USDA projects on-farm corn prices at $3 a bushel in the 2006-07 crop year, rising to $3.75 a bushel by 2009-10.

However, John Kleist, an analyst at Chicago's Top Third Marketing, tells Dow Jones that Credit Suisse is counting on a "best-case scenario."

"They are looking at the industry optimistically, from the price of corn not being too high and the price of crude oil not being too low," Kleist says, referring to the gap between the price of crude oil - currently around $58 a barrel - and corn futures.

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