You are here
Multi-year market impacts of ethanol explosion
The past few weeks I've talked about the heady bullish indications we've been
getting from our USDA Chief Economist, Dr. Keith Collins (see
http://www.usda.gov/oce/index.htm and click on his Sept. 6 or Oct. 12
presentations), and also the Iowa State University preliminary study on ethanol
plants (http://www.card.iastate.edu/, click on Nov. 6 report).
These were some
pretty bullish market indications, including Collins assertions of the
possibility that corn would run to new highs, the possibility that the ethanol
demand was like the Russian grain demand shock in the 70's, and ISU's
conclusions that at current price levels of crude oil and the ethanol subsidy,
ethanol plants could pay $4.05 for cash corn and still cover all their costs
(including investment costs).
These are some pretty interesting things, but there is another story here that
is still untold, and that is the interesting numbers game to be played with S/D
numbers into 2007 and 2008. In the 2006 market year, we had a pretty good corn
crop and record large soybean crop yield wise, with pretty decent overall
production numbers. Yet, corn carryout is still projected to fall 1 billion
bushels. That billion bushels is about 6.7 million acres of harvested
production, or about 7 million planted acres (at 150 bu/acre). So
realistically, given the demand projected this marketing year we would have
needed another 7 million acres of planted corn to keep carryout unchanged.
Because we had 2 billion carryout to begin with, this first drop in carryout is
not such a major concern (after all, we still have a billion bu or so left over
at the end of the year).
As I believe the market has already looked forward to 2007, so must we look
forward and see what the market is so concerned about to rally $1+ in just 2
months (yes, we are looking ahead to 2007 S/D today, and not waiting until next
March/April to do so). If we only had to worry about demand equal to 2006, it
wouldn't be as great a stretch to get 7 million more planted acres of corn to
keep carryout unchanged. But the problem is that ethanol use will probably
expand again aggressively in 2007. But how much?
Current USDA projections for ethanol demand are 2.1 billion bu to produce 5
billion gallons of ethanol in 2006. Currently there are 106 ethanol plants
producing these 5 billion gallons, with another 48 under construction (some
estimates as high as 62 under construction) and 7 expanding capacity. There
also are estimates as high as 231 additional plants in the planning stages.
Even if just the plants currently being built are completed, we still are
looking at a significant expansion well into 2008. If even one-forth of the
planned ones still go ahead, it expands well into 2009 and 2010.
From current USDA statements, Pro Ag's best estimates of ethanol production is 7
billion gallons in 2007, 8.5 billion in 2008, 9.5 billion in 2009, and 10
billion in 2010. The bushels needed to use for ethanol would expand to 2.85
billion in 2007, 3.4 billion in 2008, 3.8 billion in 2009, and 4 billion in
2010. The projected expansion in ethanol alone (and other demand unchanged)
would mean we need an additional 5 million acres of corn in 2007 just to meet
expanded ethanol demand (that we need to add to the 7 million to prevent losing
another billion bu carryout like we did in 2006), an additional 3.7 million
acres in 2008, 2.5 million in 2009, and 1.25 million acres in 2010.
an expansion of around 12 million planted acres in 2007 is needed to meet all
demand and leave roughly 1 billion carryout (a comfortable amount). And we'd
need additional acreage expansions in 2008-2010 of 7.5 million in addition to
the acreage hike in 2007, or a net 19.5 million acre expansion in 4 years!
That's a lot of acres, and almost everyone agrees the market is probably not
capable of expanding corn acreage that fast - especially for the 2007 year.
That leaves a lot of pressure on prices to cut demand somewhere to make demand
For 2007, the market can probably take as much as 7-8 million acres from
soybeans (about 280-320 mb less production than this 2006 year) and still have a
comfortable soybean carryout. This is the most logical conclusion one can
reach, as with 565 mb current soy carryout, there's plenty of room for lost
acres here. Now 2007 soy carryout is down to 240 mb. But in 2008, we need
another 3.7 million acres of corn to feed the additional ethanol demand for that
year's new plants, so once again we may need to rob soybean acres to meet the
ethanol demand. Now we cut soybean acres even further (say 420 mb from 2006?)
and 2008 soybean carryout goes very negative - not possible in a food/feed
environment. Somewhere along the line, we have a supply problem which needs to
be worked out by the marketplace.
So there's the conundrum which puts as Collins said, "...a gleam in some corn
producers' eyes but a frown on some corn users faces." Particularly in 2007, we
have a corn acreage shortage of perhaps up to 12 million acres (maybe 9-10
million with some demand cuts due to high prices).
This shortage could be
mostly answered by causing producers to shift 8 million or so of soybean acres
(no small task to producers used to a 50-50 rotation). But then you create a
big problem in soybeans for 2008 (negative carryout in beans if the acres go to
corn, not enough corn if the acres stay or shift back to beans). Perhaps the
biggest bidding war for acres might come in 2008, not 2007, as soybeans in 2008
will have to really bid for acres and not just tag along behind corn gains.
The market has a huge job to do in the coming few years, not just 2007, and one
which will include huge price volatility/uncertainty and bumps and grinds around
the issues. Corn should be the bull leader going into 2007, then we have the
typical weather cycle (which could be huge if we have below trend yields), and
then perhaps a more pronounced bidding war for acres in 2008 that includes
soybeans. By the end of 2008, we should have a lot of problems solved, but
where will prices be at? Is the market trying to cut demand now (while supplies
seem plentiful) to reduce the adjustments later?
If everything works out as diagramed here, it could be a very interesting few
years, indeed! And all caused by the little ethanol snowball that just keeps
growing with time, and is becoming a corn market giant!
The past few weeks I've talked about the heady bullish indications we've been getting from our USDA Chief Economist, Dr. Keith Collins (see http://www.usda.gov/oce/index.htm and click on his Sept. 6 or Oct. 12 presentations), and also the Iowa State University preliminary study on ethanol plants (http://www.card.iastate.edu/, click on Nov. 6 report).