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Ethanol, corn highlight FAPRI 2007 baseline

Agriculture.com Staff 03/06/2007 @ 9:30am

High corn prices are expected to bring major shifts in crop production the next two years, bringing an additional 8.4 million acres to corn in 2007.

Ethanol, derived mostly from corn, has become a driving force in the 2007 agricultural economic baseline prepared for the U.S. Congress by the Food and Agricultural Policy Research Institute (FAPRI).

Corn use for ethanol is expected to almost double in the 2007 crop year from that of the 2005 crop and could exceed 4 billion bushels, or 32% of the nation's corn crop, by 2009, according to a FAPRI report.

Increasing ethanol production drives the corn price from a $2 per bushel average in the two previous crop years to slightly above $3 per bushel in every year of the 10-year baseline.

Current prices are above those levels exceeding $4 per bushel. "Those prices are higher than our projections, as the market encourages producers to plant more corn in 2007 to feed the growing ethanol industry," said FAPRI analyst Pat Westhoff.

U.S. farmers have not planted 85 million acres of corn since 1949. The FAPRI projection of 86.7 million acres in 2007 fell midrange in current trade projections. FAPRI projects almost 90 million corn acres in 2008.

While corn gains acres, soybeans give up the most, falling to 70.5 million acres in 2007 from 75.5 million acres in 2006. Wheat acres, most of which were planted this past fall, increased to 60.1 million acres in 2007, but are expected to drop in following years to 57 million acres by 2016.

The FAPRI baseline was prepared by think tanks at the University of Missouri-Columbia and Iowa State University. MU maintains computer models of the U.S. agricultural economy. ISU tracks global markets. Economists at other universities participate.

"So much depends on the price of petroleum," Westhoff said. MU FAPRI uses a baseline assumption that the oil price falls to $50 per barrel in 2016. Forecasts on oil, interest rates and other macroeconomics come from the private forecasting firm Global Insight.

FAPRI assumes normal weather and continuation of present farm policies, including current biofuel incentives through the 10-year baseline.

Computer runs of 500 alternative scenarios show prices can be much higher, or much lower, than averages in the baseline, depending on weather, oil prices and other factors.

"Current tax polices that support biofuel are slated to expire in 2008 and 2010," Westhoff said. "If the credits expire, the results could be sharply lower biofuel production, corn and soy oil demand and crop prices."

The current outlook depends on the price of corn not becoming too high, removing profits from the ethanol plants. Baseline projections show ethanol production remains profitable. Lower ethanol prices and higher corn prices would squeeze projected margins for ethanol plants, eventually slowing growth in plant capacity.

Overall, net farm income dropped $26 billion dollars in 2006 from a record high of $85 billion in 2004, with higher input costs largely responsible. Net farm income could rise to $7 billion in 2007 to $66 billion and could remain above $60 billion in later years.

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