Iowa Farmer Today
12-15-06
Growth of ethanol industry outpaces expectations
By Tim Hoskins, Iowa Farmer Today
Processors and corn importers may soon feel the effect of higher corn prices.
Growth in the ethanol industry is the reason for the higher prices.
Economists were expecting the ethanol industry to come on board in 2007 and
early 2008, Bob Wisner, Iowa State University Extension economist, said
during a recent Integrated Crop Management Conference.
“It occurred a year early,” he said.
The amount of corn used to make ethanol grew from 1.6 billion bushels from the
2005 crop to 2.15 billion bu. from the 2006 crop.
As a result, the 2006 corn crop will be one of the top three crops produced.
However, production will be 1.1 billion bu. below the expected demand.
The crop marketing year, which began Sept. 1, started with 1.8 billion bu. or 8.6
week supply of corn.
With the increased demand coming from ethanol, the carryout at the end of the
marketing year ending Aug. 31, 2007, is projected at 600 million bu. or a threeweek supply.
As a result, the price of a bushel of corn surpassed $3 per bushel for the fifth
time in 46 years.
The first question that comes to mind with higher prices is how will this situation
affect the ethanol industry that sparked this rally.
Many in the ethanol industry, including Wisner, say many ethanol plants being
planned might not get built.
The ethanol plants scheduled to come into production in the next 18-26 months
are projected to use an additional 2.1 billion bu. of corn.
Wisner said many ethanol plants are running 20 percent over their rated
capacity.
If the price of corn continues to rise, it might force those plants cut production.
For every 10 cents per gallon the price of ethanol rises, the price of corn can
increase 28 cents/bu. Every $1/bu. hike in corn prices raises the cost of
producing ethanol by 36 cents per gallon.
Wisner figured the current margin for ethanol was about 65 cents per gallon,
assuming it costs $1.66 to make ethanol, based on current corn prices and
ethanol prices of $2.25/gallon as of late November.
That margin includes the 51-cent/gal. government incentive for ethanol
production.
Wisner said the margin drops to zero when corn reaches $5/bu.
The price of what an ethanol plant can pay for a bushel of corn depends on cost
of oil.
High corn prices could also be felt in the corn export market. However, at the
moment, high prices do not seem to be affecting exports.
When Wisner ran the figures through late November, U.S. corn exports were
running 35 percent above a year ago, 26 percent above two years ago and 21
percent above three years ago.
For a comparison, corn exports are down 21 percent from 1995-1996, the last
time corn prices reached over $3/bu.
However, looking at Wisner’s balance sheets heading into the 2007-2008
marketing year, he forecasts corn exports will be 1.8 billion to 2 billion bushels.
He predicts the United States will export 2.2 billion bu. of corn this marketing
year. In the 2008-2009, corn exports are forecasted from 1.75 billion to 1.95
billion bu.
In earlier grain marketing news, traders were pushing corn prices higher to entice
farmers to plant 9 to 12 percent more corn in 2007.
The corn market retreated some after hearing reports of some places running out
of anhydrous ammonia this fall because farmers were applying fertilizer to plant
corn this spring.