Ethanol Needs Shifting U.S. Crop Markets toward Corn

"Ethanol production has doubled in the last four years and is projected to double again over the next four years," said Westhoff, who was presenting to an audience of 105 at the annual Breimyer Seminar on the MU campus. The theme of the agricultural policy discussion was "BioFuels: An Agricultural Revolution?"

Ron Plain, seminar coordinator and MU Extension economist, said "Turning farm crops into automobile fuel has the potential to be the biggest change in U.S. agriculture since the introduction of the soybean."

New FAPRI projections indicate fewer acres planted to soybeans and wheat as more acres are planted to corn to meet ethanol demand. At present, corn and soybean acreage is about evenly divided in the Corn Belt, which covers Missouri, Iowa, Illinois, Indiana and Ohio. For 2006, each crop takes about 36 million acres.

By 2010, the end of the five-year revised FAPRI baseline, the five-state acreage for corn could reach almost 39 million. Soybeans would drop to 33 million acres.

In spite of rising corn production, FAPRI projections say corn prices also go up due to increased demand from the growing number of ethanol plants. The average corn price is $1.98 per bushel for the 2005 marketing year just ending. The price for the crop now growing in the field is projected at $2.33. By 2010 the average price jumps to $2.69 per bushel in the outlook.

FAPRI baseline projections assume normal weather and continuation of current government policies. Both can change, Westhoff said.

Westhoff pointed out ethanol production rose due to a 51-cent tax credit and a renewable-fuel mandate that 7.5 billion gallons of ethanol, or other renewable biofuel, be used. He added that current projected ethanol production far exceeds mandated biofuel levels.

Gary Marshall, executive director of the Missouri Corn Growers Association, said, "The renewable fuel mandate provided a floor that gave encouragement to investors in ethanol plants," adding that all ethanol plants in Missouri are farmer-owned.

Use of agricultural equity allows farmers and landowners to participate in economic renewal in rural areas of the state, Marshall told the audience.

The prospect of increasing returns from corn draws more available crop acreage into corn production, Westhoff said. Some attending the conference expressed concern about farmers pulling land out of the soil-saving Conservation Reserve Program (CRP) and putting it into crop production. Westhoff said land could be drawn out of CRP -- the amount depends on markets and policy decisions.

Higher energy prices have driven the surge in ethanol production. "Current market conditions encourage very rapid growth in biofuels," Westhoff said. "That is not likely to slow."

"The greatest risk for biofuel investments is a downturn in petroleum prices," Westhoff said. "Rising grain prices will likely have little impact on slowing ethanol production. The price of corn would have to get very high before an ethanol plant would shut down."

In an interview after the program, Abner Womack, co-director of FAPRI said, "One scenario for lower petroleum prices would be a global economic recession that caused China and India to back off on their increasing use of gasoline."

While the outlook for ethanol producers seems promising, there are risks to growers, Westhoff said. "Increased demand and lower carryover stocks could lead to greater volatility in corn prices. Risk management becomes a bigger issue."

Rising corn costs place greater pressure on beef, pork and poultry producers who feed that grain, Westhoff said. Partially offsetting that shift in feed demand is an increasing supply of distiller's byproduct grains that can be used in livestock rations. Feed nutrients are left over after starch in grain is converted into alcohol.

"A cattle feedlot located near an ethanol plant would have an advantage," Westhoff said. "A feedlot farther away might not find it practical to use byproduct feeds and would pay more for corn." A concern for livestock producers is "too much, too fast," Westhoff said. Livestock feeding systems will require a transition period to learn to use all of the byproduct feed coming onto the market.

"Big questions remain," Westhoff said. "What will happen in a drought year with a short corn crop? Who will bid the most to get the needed grain?"