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A look back on ethanol expansion and corn basis

Agriculture.com Staff 02/27/2007 @ 8:48am

Growth in the ethanol industry has been a driving force in the corn futures market in the last 6 months. Everyone is aware of the phenomenal growth in new plants that will be coming on line in the next year or so. But what can we say about what impact the recently opened plants have had on local cash corn markets?

In the last year, new plants have sprung up in California, Missouri, Minnesota, Michigan, Iowa and Colorado. The heaviest concentration of these new plants was in Iowa, although even Michigan opened the doors on two new plants in the southern parts of the state.

In the map below, we illustrate what has happened to basis over the last year. Specifically, we look at the difference between corn basis in February 2007 and February 2006. Areas in green are places where basis in 2007 is stronger than it was in 2006 while darker red areas signify losses in basis between 2006 and 2007. Also, it is important to keep in mind that other factors besides new ethanol plants have altered basis patterns in the last year. Drought conditions in the western Plains created a short-crop scenario in this region and the result has been a stronger basis.

The map shows stars for existing and new ethanol plants in 2006. The solid black stars are those plants that came on line in 2006. In Iowa, new plants in central and western portions of the state led to fairly good basis improvements in the last year. Gains of 5-cents a bushel were fairly typical in this region, even though the eastern portion of the state experienced losses of 10-cents over this time period.

In other areas, where corn is less abundant, the impacts were more pronounced. Around the Laddonia, MO plant, basis levels are 10 cents higher then they were last year, while the North Dakota plant is paying 25 cents a bushel more for corn on basis then the market was valued in 2006.

With 57 plants currently under construction, it makes you wonder just how big the impact on basis will be over the coming year and a half as these new plants will open. The key will be in getting the appropriate production response from producers for their 2007 corn crop and enough bushels around these new plants. But that question will remain unanswered until we get the plantings report at the end of March.

Growth in the ethanol industry has been a driving force in the corn futures market in the last 6 months. Everyone is aware of the phenomenal growth in new plants that will be coming on line in the next year or so. But what can we say about what impact the recently opened plants have had on local cash corn markets?

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