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What would more ethanol production mean for your farm?

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.

With the increased production of corn, the Corn Belt will see some changes in culture and practices, according to Keith Collins. "The main conclusion is that along with bringing new land into production, induced changes in crop rotations and tillage practices from increased corn production lead to increases in soil erosion and nutrient loading, particularly in the Corn Belt and Northern Plains, where adjustments are the greatest," he says. Collins adds he assumed the CRP will remain at 39.2 million acres, but indicates rental rates will dictate what really happens to CRP acreage.

Regarding crop rotations, the area devoted to continuous corn increases throughout the Corn Belt, the Northern Plains and the Great Lakes states. That also requires changes in tillage practices.

"In the Corn Belt, the increase in crop acreage leads to an increase in use of all tillage types except moldboard. Mulch tillage increases more than conventional tillage. In the Northern Plains, no-till and conventional tillage increase, with mulch tillage use decreasing," Collins says. "Nitrogen fertilizer use increases in every region except for the Pacific region. The percentage increase is at or above the national average in the main corn-growing regions under both scenarios."

With the DDGS production lowering the cost of livestock feeds, the increased production could spawn livestock operations near ethanol plants, but the Collins group doesn't see that happening. "We do not anticipate major shifts in livestock production with the advent of higher prices for corn and possibly other feeds driven by increased ethanol demand. The extensive infrastructure in place to support existing production, especially in vertically integrated industries, is a significant factor constraining regional shifts."

It is no surprise that the U.S. is producing more ethanol than anyone could have imagined, and that production is increasing at a substantial rate. If the U.S. achieves production of 1 to 20 billion gallons of ethanol in the next 10 years, acreage will increase well above 90 million for corn, demand will raise corn prices, continuous corn acres will be more prevalent, tillage practices and fertilizer use will change. While crop income will rise, the cost of livestock production will depend in large part on use of DDGS in rations. Pork production will decrease and retail prices rise, taking beef and poultry prices higher.

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.

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