|While corn prices will increase due to ethanol demand, total operating costs for corn production will increase as well.|
Demand for ethanol is capturing an increasing proportion of the US corn crop, and could become the number one factor driving farm prices higher over the next few years, according to Keith Collins, Chief Economist of the US Department of Agriculture (USDA). Corn is currently the predominant feedstock for ethanol production in the US.
The USDA expects ethanol production this marketing year to account for 14% of US corn production. The agency projects that ethanol will account for 22% of corn use by 2010 and drive corn prices to $2.60 per bushel.
Collins made the remarks in an opening speech to the USDA’s Agricultural Outlook Forum 2006.
By contrast, current biodiesel use remains relatively small, equivalent to 2.5% of soybean oil production—about where ethanol production was relative to corn production in 1983, according to Collins.
Demand for biofuels—specifically ethanol—is one of four primary factors that will shape the economic prospects for the major crop markets over the next few years. The others are:
The divergence in global grain and oilseed markets;
Rising energy and interest costs; and
While high energy prices are creating new opportunities to use crops for energy, energy is also a production input. Supplies of inputs and their prices are increasingly important for global agriculture. In some countries, the problem input is water or seeds or machinery. Our concern this year in the US is energy in the form of diesel, natural gas, propane and fertilizer.
For 2006, the Department of Energy projects that diesel and natural gas will cost another 4-5 percent more on top of the 35 and 20 percent increases, respectively, that these fuels saw in 2005.
For 2006, energy [required for corn production] is expected add 5 cents to national average corn operating costs compared with a year ago and 21 cents, or 45 percent more than costs two years ago. These rising costs will reduce farm income and have some affect on acreage and production in 2006.
The ongoing drought in Illinois and Iowa, and an intensifying drought in the southwest will exacerbate production problems, especially for grain.
Winter wheat in Texas was rated 89 percent poor or very poor as of February 5. The warm January has left much of the nation’s crop exposed without snow cover. Our wheat problems are matched in the Former Soviet Union, an important grain producer, where planted acreage of winter grains are down and they are having a very harsh winter with above average much winterkill expected. These poor starting conditions suggest global wheat production will be down again in 2006/07.
The USDA notes that the surface temperature of the Atlantic Ocean in 2006 is expected to remain on the high side of the temperature cycle, and there is a La Nina, which are both correlated with increased hurricane activity. The multiple devastating hurricanes of 2005 disrupted the central agricultural marketing infrastructure of the country.