Report: US Ethanol Production Will Cause Long-Term Rise in Crop Prices

20 May 2007

Under a high-oil price scenario ($64/barrel in 2016), ethanol production zooms up to account for 60% of utilization of a corn crop that itself will expand 48% to more than 18 billion bushels. Click to enlarge.

A new report from the Center for Agricultural and Rural Development (CARD) at Iowa State University projects that ethanol demand will cause a long-term increase in crop prices.

The report’s baseline projection sees corn ethanol production essentially plateau in 2011 at 14.8 billion gallons, with only a slight increase to 14.9 billion gallons by 2016. Under this scenario,  corn acreage will increase to almost 94 million acres with a concomitant reduction in soybean acres. The report estimates season-average corn prices of approximately $3.40 per bushel, and soybean prices averaging about $7.00 per bushel.

Currently, July 2007 corn futures are trading at around $3.70 per bushel and July 2007 soybean futures are trading at around $8.00 per bushel. In response to what they forecast as permanently higher feed prices, the CARD staff assumes that livestock producers will eventually reduce production to allow their higher production costs to be passed onto consumers.

If, however, oil prices are permanently $10-per-barrel higher than assumed in the baseline projections, the authors forecast that corn-based ethanol production could increase to 30 billion gallons per year by 2016—twice the production in the lower oil price scenario. The report authors used a projected decline in oil prices down to $54/barrel by 2016 in their baseline scenario.

Under the high oil scenario, corn acreage increases to 112 million acres with production of 18 billion bushels of corn—up 48% from 12.2 billion bushels.

The magnitude of the expansion will depend on the future makeup of the US automobile fleet. If sufficient demand for E-85 from flex-fuel vehicles is available, corn-based ethanol production is projected to increase to over 30 billion gallons per year with the higher oil prices. US corn acreage would increase to more than 110 million acres—largely at the expense of soybean and wheat acres—with 60% of the crop going to produce fuel alcohol.

Equilibrium corn prices would rise to more than $4.40 per bushel. The direct effect of higher feed costs is that US food prices would increase by more than 1.1% over baseline levels. Beef, pork, and poultry prices would rise by more than 4% and egg prices would rise by about  8%.

The authors also cast doubt on the prospects for energy crops such as switchgrass for use in cellulosic ethanol production in the Midwest.

Cellulosic ethanol from switchgrass and biodiesel from soybeans do not become economically viable in the Corn Belt under any of the scenarios. This is so because high energy costs that increase the prices of biodiesel and switchgrass ethanol also increase the price of corn-based ethanol.

So long as producers can choose between soybeans for biodiesel, switchgrass for ethanol, and corn for ethanol, they will choose to grow corn. Cellulosic ethanol from corn stover does not enter into any scenario because of the high cost of collecting and transporting corn stover over the large distances required to supply a commercial-sized ethanol  facility.

Resources:

• Emerging Biofuels: Outlook of Effects on US Grain, Oilseed, and Livestock Markets