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A 'snowball': Ethanol industry development top ag story of 2006

Agriculture.com Staff 12/22/2006 @ 12:39pm

Two stories, which in many ways are deeply interwoven, topped the list of news stories in agriculture during 2006.

As voted on by Agriculture Online users during December, the ethanol industry's development throughout 2006 came away with almost half of the votes (49%), followed by high commodity prices with 39%. Other stories receiving votes were drought in the western U.S.; the mid-term elections and changes in federal ag leadership; another near-record year for corn and soybean production; immigration issues and agriculture; no Asian soybean rust in the Corn Belt; fuel prices decline; and ongoing beef trade disputes abroad.

Why was ethanol head and shoulders above all other ag-related stories? It was a combination of factors that caused a "snowball" of momentum, according to Eddyville, Iowa-based Cargill senior grain merchandiser Ray Jenkins.

"We had several years of growth while ethanol prices were modest, the business was growing slowly and capital formation was building slowly," he says. "Then, with a combination of the RFS coming into play and crude oil going to $75 per barrel, we had $2- to $3-per-gallon ethanol prices. It was just like lighting a match under a can of gas."

"High energy prices caused unprecedented profitability in the ethanol industry and that, in turn, has propelled huge investments in new plants," Grabanski says. "Plants under construction today will be completed in a year-and-a-half to two years, so that construction probably indicates increased demand at least a couple of years."

These "huge investments" comprise one aspect of the ethanol industry that Jenkins says changed the most in 2006.

"Five years ago, people had three equity drives and two bake sales to get 35% of the equity," he says. "Now, we have people running around with $115 million checks in their pockets."

Why has ethanol's expansion become the biggest ag story of 2006 for corn growers?

"It's because the corn price is a buck higher now than it was three months ago," says Belmond, Iowa, corn grower and ethanol investor Dave Nelson.

Of greater significance to growers, however, is not what the industry has meant in 2006, but how it will change corn production in the coming year, Nelson says.

"I think a lot of guys are preparing to plant more corn," he says. "There has been a tremendous amount of fertilization, tillage and preparation going on for more corn."

Nelson adds he's already planting 62% of his acres to corn, with current storage capacity for around half of his grain.

As an ethanol investor and farmer, Nelson says the higher corn prices have been a double-edged sword. While it's meant higher returns for his farm operation, it's caused a bump in ethanol prices.

While these higher ethanol prices will likely change as more production capacity comes online in 2007, Nelson adds corn demand will remain high and growers will respond by upping production. The end result, he says, will be overall lower corn prices for 2007 compared to the previous year.

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