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Ethanol train still building momentum?

Agriculture.com Staff 12/20/2006 @ 8:56am

The ethanol train has been the story of 2006, with huge profits from ethanol plant processing and tremendous interest from investors in building more plants. The past year's profit from ethanol extraction might have more than paid for some plants over the past 12-24 months.

The pace of building has made the market outlook for the next few years look very bright, as US expansion of corn acres needed to meet the additional demand is estimated at 5 million acres/year last year, and for the foreseeable future.

US support of ethanol use is strong, with most politicians unhappy with US policy in the Middle East and interested in more domestic methods to solve our dependency on energy. Ethanol has been a natural solution to many problems including chronic overproduction of grains and a shortage of energy. Most candidates in the past midterm election campaigned in support of ethanol, and the current push seems for more support of biofuels, not less, in policy decisions.

While this seemed almost a perfect situation, the rapid market price rise the past few months has changed some attitudes, as some pain is being felt by livestock producers, importers, and biofuels producers with higher prices of grains. While the higher prices are trying to solve what could become a supply shortage situation in the future, the situation of attracting acres away from other food/feed uses into corn is starting to have some repercussions in other areas. We are starting to hear some grumbling of the results of the adjustment process as resources are shifted to respond to the market situation. Some US think tank type groups are starting to question the wisdom of drastic shifts in resources from food/feed use to energy production.

Markets will work in the long run, but in the short term there are certain issues that are generated. But in the end, isn't that exactly how markets can work?

China's announcement this week of placing some limits on the use of corn for energy was the first official government declaration that shifting lots of resources to energy production may not be in their best interest.

This could have far reaching implications for the grain markets. Is this a sign of the biofuels revolution beginning to end? Or is US policy likely to be the dominant player in the biofuels revolution? China is the first government to announce some inclination to limit the use of grains for fuel, while other countries (EU and US) are pushing hard for biofuels in their official government policy. The whole premise of the marketplace today is based upon the continued development of biofuels and the difficulty the marketplace will have to try to meet that additional demand. This is somewhat different than the Russian Grain buying of the 70's as this was outside our control, where today the biofuels revolution is a policy put forth by elected officials in our two regions.

The Chinese announcement of a potential policy change is the first indication by anyone that a potential policy change could occur. This could greatly cripple the rally, as the assumption under current policy is that we will develop a shortage of food/feed by burning it up in our fuel tanks. So the market is bidding up prices of grain to solve this potential future problem today.

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