Growth of ethanol industry likely to boost competition for corn

Growth of ethanol industry likely to boost competition for corn

Ethanol plant construction likely will change how corn moves in Iowa and throughout the country.

”It just changes everything,” Chris Hurt, a Purdue ag economist, says of the growing number of ethanol plants and their effects on agriculture.

Generally, the growth of the ethanol industry likely will reduce the amount of corn available for exports or livestock feed.

Overall, ethanol plant construction likely will lead to a higher basis variability, and regional basis patterns within Iowa will attract corn from other areas of the state in a normal year, says Robert Wisner, Iowa State University Extension economist.

In a short crop year, the potential is for very strong corn prices as ethanol plants and other corn-dependent industries bid for limited stocks. That could be a negative for livestock producers.

If there is a short crop from either a drought or flooding, it is not likely foreign buyers will exit the market. They likely will increase their bids, says Wisner.

Wisner and Phillip Baumel, a retired ISU economist, and Marty McVey, chief economist with AGRI Industries in Ankeny, researched the overall effect of ethanol plant construction on grain movement throughout the state.

In the study, they compared corn production and use in 2003 with two potential scenarios in 2008 in Iowa.

The 2003 scenario assumed 1.93 billion bushels of corn produced in Iowa and 251 million bu. used in ethanol production. In the first 2008 scenario, corn production rose to 2.04 billion bu. with 808 million bu. used for ethanol.

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

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

If corn acreage remains the same as 2003, the amount of U.S. corn available for export would fall from 2.1 billion bu. in the 2004-2005 marketing year to 900 million bu. 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 bu. in 2003 to between 383 million to 222 million bu. in 2008 under the two scenarios.

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

Ethanol plants tend to have no more than one or two weeks’ supply of corn, Wisner explains.

That means the ethanol plants might have to bid aggressively during times of field work or when supplies are short.

When corn topped $5/bu. in May 1996, some ethanol plants reduced hours or closed. However, with the new federal Renewable Fuels Standard (RFS) they must deliver ethanol, he explains. The RFS guarantees a certain amount of fuel will be made from renewable sources and raises that standard annually until 2012.

”The result could be very high prices for corn,” he says. ”It’s good for corn prices and farm income,” he says.

However, the higher corn prices may be negative for some of the livestock producers that will have to bid for corn against ethanol plants and foreign exports.

However, the ethanol boom could be good for livestock producers.

”It could bring livestock production back to the Midwest,” Hurt says.

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 on corn from a traditional 50/50 corn/soybean rotation.

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