Ethanol Appetite To Take Big Bite

The ethanol industry’s appetite for corn is going to surge in the coming months and producers will likely lower corn acreage for the 2008 crop, says a Purdue University expert. What does this mean for your corn growers?

"This has two major implications," explains Chris Hurt, Purdue Extension agricultural economist. "First, the corn-based ethanol industry will have excess production capacity and therefore narrow margins, and at times negative margins, for periods during the next two years.

"Secondly, corn prices will be historically high for the recently harvested 2007 crop and for the 2008 crop, and perhaps the 2009 crop too," he says. "We’re looking at corn in the mid-to-high $4 range."

As of Dec. 18, total ethanol production annually in the U.S. was 7.3 billion gallons, according to the Renewable Fuels Association (RFA). An additional 6 billion gallons of capacity from plants under construction are expected to come online in 2008 and be added to the 7.3 billion gallons.

"The most rapid period of new plant openings will occur in the first half of 2008 when we estimate the nation’s annual capacity will surge from the current 7.3 billion gallons to 11.8 billions gallons," Hurt says. "This means the amount of corn required annually to feed that capacity grows from about 2.5 billion bushels today to 4 billion bushels by July of 2008."

Hurt predicts the rate of new plant openings will slow in the later half of 2008, where an additional 1.7 billion gallons of capacity will come online, which pushes the RFA numbers up to 13.5 billion gallons. "This will require about 4.5 billion bushels of corn if these plants are to run at full capacity," Hurt says.

Not only will ethanol be competing for corn in 2008, but so will other crops. "All major crops are in short supply in the world and some will outbid corn for acreage," Hurt explains. "The shortest of the major crops are wheat and soybeans and the prices are expected to drive acres away from corn in 2008. Assuming a 6 percent decline in 2008 acres, U.S. production would drop to 12.4 billion bushels with a usage base at about 13.3 billion. This means there will be a need to ration the small crop with high prices."

Hurt says as a result it’s likely the ethanol industry will have to cut usage below the 4.5 billion bushels (the level of full capacity) to a rate closer to 4 to 4.1 billion bushes.

"If so, this means the nation’s ethanol plants might run at levels that are about 10 percent to 12 percent below full production, or 88 percent to 90 percent of total production capacity," he says. "This also implies that cash corn prices will need to be high enough to convince some ethanol producers to run at less than full capacity.

"Given the outlook for $2 plus per gallon ethanol prices and $160 per ton distiller’s grains into the fall of 2008, implies we will be seeing cash corn prices in the $4.25 to $4.75 range," he says. "It will not be until 2009 when corn production may be able to meet the demand."

(Source: Purdue University)
 

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