May 2, 2007

 

Booming ethanol could heighten competition for corn

 

 

The mushrooming of ethanol plants all over the US could create changes on the movement of corn trade in Iowa and throughout the country.

  

Generally, the growth of the ethanol industry will likely reduce the amount of corn available for exports or livestock feed but will lead to a higher basis of variability and regional basis patterns as Iowa will attract corn from other areas of the state in normal year, said economist Robert Wisner from the Iowa State University (ISU) Extension.

 

According to Wisner, the potential relies on very strong corn prices as ethanol plants and other corn-dependent industries bid for limited stocks in a short crop year which could affect livestock producers.

 

Wisner added if short cop resulted from either drought or flooding, it is unlikely that foreign buyers will exit the market but will probably increase their bids.

   

Wisner together with Phillip Baumel, a retired ISU economist, and Marty McVey, chief economist with AGRI Industries in Ankeny, has conducted a study on the overall effect of ethanol plants in the movement of grains in Iowa.

 

Included in the study is the comparison of corn production and use in 2003 with probable scenarios in 2008 in the state.

 

The 2003 scenario assumed 1.93 billion bushels of corn produced in Iowa and 251 million bushels used in ethanol production while 2.04 billion bushels have increased in 2008 and 808 million bushels were utilised for ethanol.

 

The other 2008 scenario increased corn used for ethanol to 970 million bushels.

 

In 2008, the expected national ethanol use is expected to be nearly 2.8 billion bushels.

 

If corn area remains the same as 2003, the amount of US corn available for export would fall from 2.1 billion bushels in the 2004-2005 marketing year to 900 million bushels in 2008.

 

Using the numbers from the report, the amount of Iowa corn available for shipment outside of the state could be reduced from 825 million bushels in 2003 to between 383 million to 222 million bushels in 2008 under the two scenarios.

 

The demand for corn for ethanol production is expected to increase from 250.5 million bushels in 2003 to 557.8 million bushels in 2008. Corn used in the wet-mill process is expected to remain steady at 371.7 million bushels.

 

Ethanol plants tend to have no more than one or two weeks' supply of corn, Wisner explains, meaning ethanol factories might have to aggressively tender on field work or shortage of supplies.

 

When corn reached US$5 per bushel in May 1996, some ethanol plants have reduced working hours or have closed operations. But with the new federal Renewable Fuels Standard (RFS), ethanol plants are required to deliver their product. The RFS guarantees a certain amount of fuel will be made from renewable sources and raises that standard annually until 2012.

 

He said the result would be high prices of corn which is good for the corn farmers.

 

As analysts foresee higher corn prices to adversely affect livestock farmers who will wage war for corn from ethanol producers, it could restore livestock production in the Midwest, said Christ Hurt, economist from the Purdue College of Agriculture.

 

While seeing a boom in the Eastern Cornbelt, Hurt says ethanol plant construction there will mean less corn available to be shipped to the Southeast for poultry and swine feed. 

 

He says the increased price for corn added to the extra transportation costs could mean it's cheaper to feed livestock in the Midwest than in other areas of the country.

 

Another change in the building of ethanol plants that could affect Midwest agriculture is an increase of corn acres and less soybean ground.

 

From 2003 to 2005, Illinois and Iowa have switched about 3 million acres from soybeans to corn. The question for the industry is how many more acres will switch to corn from a traditional 50/50 corn/soybean rotation.