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Now the questions begin

Agriculture.com Staff 11/17/2006 @ 2:28pm

Cheap corn prices in the late 1990s and for most of the first half of this decade, were in large part responsible for the rapid growth in the ethanol industry. In addition, high energy prices the last two years and legislative mandates for clean air have also helped provide underlying support for ethanol.

With cheap corn prices, there did not appear to be much concern from the other sectors of corn users. However, faster-than-expected growth for ethanol is beginning to create stress for traditional corn users.

Now, after a significant price rally this fall, traditional corn users are beginning to take another look at how the ethanol industry, in part, is responsible for higher corn prices and a depreciation to their bottom line.

If corn prices stay high, expect to hear much concern and issue regarding previous legislative actions to provide a subsidy to ethanol plants. In other words, ethanol plants (just like any other end user) are buyers of corn, but government actions have provided a subsidy of 51 cents per gallon for ethanol production. For every bushel of corn that runs through an ethanol plant, in which 2.7 gallons of ethanol are derived, there is a subsidy of $1.38 per bushel of corn.

With the Democrats now in control of both the House and the Senate, it is expected that additional backing of bio fuels, including ethanol, will be front and center as a cornerstone to their energy programs. Expect ethanol to be a political hot potato if corn prices stay high.

It will not be long, and perhaps rightly so, before traditional corn end users begin asking, "Where is our subsidy?" The American public and, for that matter, the world, have become nearly complacent over food production. Yet, when looking at projected world carryout for corn and wheat, the supply tank is nearly empty.

With the U.S. subsidizing ethanol production, what happens if corn prices rally dramatically and US farmers begin to liquidate livestock herds in earnest? Will Congress come to the rescue and provide a subsidy similar to that for ethanol? Will the American public stand having to pay dramatically higher food costs? You can bet the public will ask, "Why are we subsidizing ethanol with tax dollars when our paychecks are being gobbled up by higher food costs?"

These are all valid questions that need to be answered, perhaps soon. If the world runs empty on food, look for this priority to take over all other concerns, including that of terrorism and energy supplies.

What are the odds? Who knows? However, supply and demand factors suggest that, unless the world experiences a significant rebound in food/crop production in the year ahead, supplies will continue to tighten. History suggests that the odds of improving crop conditions after a poor year, especially worldwide wheat production, are good. However, there is no guarantee. Then what?

If you have any questions or comments, please contact Top Farmer at 1-800-TOP-FARM, ext. 129.

Cheap corn prices in the late 1990s and for most of the first half of this decade, were in large part responsible for the rapid growth in the ethanol industry. In addition, high energy prices the last two years and legislative mandates for clean air have also helped provide underlying support for ethanol.

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