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What would more ethanol production mean for your farm?

Agriculture.com Staff 02/11/2016 @ 3:14pm

Friday's USDA Supply Demand report nudged upward the expected ethanol production in the coming year, subsequently nudging upward the amount of corn that will be needed for it.

Those continued adjustments in the amount of corn being refined into ethanol have always been up and with a 58% increase in new crop corn used for ethanol compared to the old crop, some of those 10-year projections are going to have to expand as well. The USDA chief economist Keith Collins has been thinking about that and dusted off his crystal ball to see where we are headed and what the ramifications will be. Buckle your seatbelt for this ride.

USDA's current projections are for 12 billion gallons of ethanol to be produced from corn in 2016, which is the end of the current 10 year baseline of economic projections. Along with ethanol production, USDA is estimating there will be 700 million gallons of biodiesel refined from soybean oil by 2016. Concerned that the current trendline points above those benchmarks, just set in February, Keith Collins and his colleagues at USDA looked at the impact of two 2016 scenarios, one with a 15 billion gallon ethanol production and the other with a 20 billion gallon production. Biodiesel production was raised to one billion gallons, for the purpose of analysis.

Current U.S. energy policy established a number of targets, in an effort to become less dependent upon foreign sources of petroleum. In doing so, USDA's 2016 baseline projects that 4.3 billion bushels of corn will be used for ethanol. For comparison purposes USDA's Supply Demand forecast for the 2006 corn crop was for 2.1 billion bushels to be used for ethanol, and as of Friday, the projection for the 2007 crop is that 3.4 billion bushels will be used for ethanol, only 900 million under the projections for 2016.

Collins' 15 billion gallon scenario would need one billion bushels more corn than the current USDA baseline and the 20 billion gallon scenario would need 2.85 billion bushels more. The one billion gallon biodiesel production would need 2.2 billion gallons of soybean oil and that would take 31% of annual production.

With the ethanol refining process, most of the production will be from dry milling plants and that means additional distillers' grains (DDGS) would be produced, replacing some of the corn that would ordinarily be fed, says the chief economist, "The displacement factor of DDGs for corn in the feed ration depends on the type of animal. One pound of DDGs is assumed to displace one pound of corn for beef cattle, 0.45 pound of corn for dairy cattle, 0.85 pound of corn for hogs, and 0.55 pound of corn for poultry."

And he says some of that will replace soybean meal in livestock rations, "Each additional bushel of corn used in ethanol production produces DDGs that displace approximately 1.2 pounds of soybean meal."

So what is the impact of all of this?

  • The price of corn will be in the $4 per bushel range beginning with the 2009 crop.
  • Soybean demand will be torn between demand for more soybean oil for biodiesel production, and the declining demand for soybean meal due to expanding DDGS supplies.
  • Soybean prices will average in the $7 range from the current crop onward, peaking at an average $8 price in 2016.
  • Corn acreage rises to 92 million acres by 2016 in the 15 billion gallon scenario and over 98 million acres in the 20 billion gallon scenario.
  • The total U.S. planted crop area expands in both scenarios, but the total area planted to soybeans diminishes slightly in both scenarios.
  • Because each livestock species consumes different rations, each of the major species is impacted differently from the higher prices of corn, and the change in availability of DDGS and soybean meal.
    1. Poultry producers use relatively more protein in feed rations than do other livestock producers. Thus, although poultry producers experience higher corn prices, they also benefit from lower soybean meal prices.
    2. Beef cattle producers also experience higher corn prices, but are able to substitute cheaper DDGs to replace a portion of corn in the feed rations; with the cost of DDGS diminishing over time.
    3. Because hog and dairy producers experience the greatest increases in feed costs relative to other livestock producers, production of pork and milk declines under both scenarios.
    4. With reduced pork production, retail prices climb and take poultry and beef prices up with it.
    5. Farm and retail prices for milk increase due to lower milk production under both scenarios.
  • Cash receipts for crops would increase $3.2 billion over the USDA baseline for the 15-billion-gallon scenario and $7.7 billion over the USDA baseline for the 20 billion gallon scenario.
  • Cash receipts for livestock increase by $1.1 billion over the USDA baseline for the 15-billion-gallon scenario and $4.3 billion for the 20-billion-gallon scenario, but feed expenses outpace those higher receipts.
  • While ethanol refineries are outbidding export markets for U.S. corn, less corn is being exported, but the corn that is shipped abroad is of higher value, and export income is increased.

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