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Giving credit where credit is due- ethanol supporters

Agriculture.com Staff 10/26/2006 @ 8:34am

Grains have rallied sharply the past month, given the decent US crop of corn and soybeans. During the harvest of likely the largest yielding soybean crop in US history, prices have rallied from a low of $5.4125 Sept. 15 to a high of $6.40 futures today (18%)! It's not often that a market with record large stocks (both world and US) can make that type of rally in a little over a month, but it is exactly what has happened in this circumstance.

Corn was even more dynamic, rallying from $2.36 on Sept. 15 to $3.3375 high today (41%). This extreme rally was in spite of an above average crop being harvested in the US, an extraordinary accomplishment for the market. Given that the US crop yield potential actually improved during this period (and especially from the Aug. 1 crop situation), this was quite an accomplishment for the market in such a short period of time.

The extremely bullish outlook is perhaps best summarized by our USDA Chief Economist, Keith Collins, in two separate statements (one Sept. 6 and one Oct 12- see them at http://www.usda.gov/oce/index.htm and click on the appropriate link). These were some of the most bullish outlooks I've read anywhere by any group, and perhaps best explain the collision course which the ethanol boom and the low corn prices had eventually come to in mid-September.

In the Oct. 12 statement, Collins explains that 10 years ago, less than 5% of corn was used for ethanol. In 2000, it was 6%; last year 14%, and for 2006, nearly 20% - over 2 billion bushels- for ethanol. The fact that over 20% of the US crop, or 2 billion bushels, is now used for ethanol use this year is demand shock that the market could not continue to ignore. Now that Pandora is out of her box, it will be difficult to put her back in! With the rapid growth of ethanol plant construction following the most recent extraordinarily profitable ethanol processing year, the projections are to grow much more in 2007. At this point, it might be important to pause and reflect on how important ethanol has been to corn use and stocks use. It also might be important to thank those responsible for that development.

Without ethanol use this year, ending stocks of corn would be around 3 billion bushels, record large for this decade! We aren't even mentioning the corn use the past 5 years that also was important to the corn demand (and expansion in production) that the US has experienced.

I recall a period as little as just a few years ago when corn and soybean growers across the US were lobbying Congress and state legislatures for support for ethanol, a fledgling industry at the time. Through countless efforts and many hours of unpaid lobbying, these groups were successful at giving this new product a chance to succeed in the marketplace. Like most new developments, it struggled mightily for years before getting the kind of marketplace reward for stockholders received last year. It was not popular at the time, it was not wildly successful, and it was not full of huge profit potential. Many scientists (wrongly, we now know) questioned the legitimacy of the energy gained. But supporters pushed on.

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