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Ethanol won't buoy corn prices forever

Will the ethanol boom continue to drive up corn prices?

In a white paper released this week by the Ethanol Promotion and Information Council (EPIC), Nathan Danielson of BioCognito and Geoff Cooper of the National Corn Growers Association (NCGA) say corn production levels will continue to climb alongside the growing demand for the ethanol feedstock. As a result, concerns about high corn prices going higher are "unfounded.

"It is unlikely that considerable price increases will be seen in the immediate future given current and expected corn production levels," Danielson and Cooper write in the white paper. "The authors believe that while the market may very well show some transitory increases in price because of increased demand, corn prices will adjust to near the historic average in the long term."

Why? Danielson and Cooper say rising yield potential and the growth and segmentation of both new and old corn markets will, in the end, keep the marketplace on an even keel. When it comes to yields, per-acre production has grown annually at a higher clip in the past decade than in the previous 50 years. This biotechnology-driven increase, from 1.5% per year from 1944 to 1994 to two percent per year since 1996, will likely translate to a 15 billion-bushel corn crop by 2020, the authors say.

Growth is not the only dynamic force pulling on the changing corn market, however. Some traditional corn markets have remained relatively static in recent years, and while ethanol's growth has created a strong demand upswing, markets like livestock feeding have grown slowly, if at all. In this regard, ethanol's presence in the corn marketplace is necessary to stabilize what otherwise might be consistently bearish.

"With the exception of ethanol, markets for corn have not seen significant growth in the past 10 years. Livestock feeding has been growing only marginally, while other markets appear to have stabilized or slightly shrunken," Danielson and Cooper write. "It is likely that without the increasing market for ethanol, corn prices would have decreased and acres would have transitioned into other crops or taken out of crop production entirely."

Even though it's relatively static when it comes to a demand driver, corn for livestock feed use should become an even smaller market segment because of the growing availability of distillers grains as an alternative feedstock, meaning less demand-driven corn price pressure.

"The idea that increased usage of corn for ethanol will increase food costs does not take into account the feed value of distiller's dried grains with solubles," the authors write. "More than half of the corn fed to beef could be replaced by [distillers grains]."

All in all, Danielson and Cooper say if current trends for corn consumption and production remain, the corn price picture will touch familiar trend-lines in the future.

"It is our belief that the use of corn for ethanol will not significantly affect the price of corn, provided that production increases at an adequate rate. The additional value captured will result from the value added nature of ethanol and not impact corn price," Danielson and Cooper write. "The pressure that might result in higher corn prices will be ameliorated by increases in production, slow or no growth in other major markets and displacement of corn as a feed by [distillers grains]."

Will the ethanol boom continue to drive up corn prices?

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