Originally published Vol. 4,
Issue 2 (April 2006)—updated May 2007
Ethanol Reshapes the Corn Market
The expanding
U.S. ethanol sector is stimulating demand for corn,
but alternatives to corn may dampen that demand.
Allen
Baker and Steven
Zahniser
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Work
is underway to add another 6.2 billion
gallons to the annual capacity of the
U.S. ethanol sector. |
|
To
meet the sector’s growing demand
for corn, some U.S. corn is likely to
be diverted from exports. |
|
In
the future, corn may cease to be the
main feedstock for U.S. ethanol production
if cellulosic biomass is successfully
developed as an alternative. |
|
This
article is drawn from . . . |
Feed
Outlook, by Allen Baker and Edward
Allen, FDS-05j, USDA, Economic Research Service,
November 2005.
2007-16
Long-Term Agricultural Projections,
Paul Westcott, ERS Contact, OCE-2007-1, USDA,
Office of the Chief Economist, World Agricultural
Outlook Board, February 2007.
USDA
Agricultural Baseline Projections to 2014,
Paul Westcott, ERS Contact, OCE-2005-1, USDA,
Office of the Chief Economist, World Agricultural
Outlook Board, February 2005.
|
You
may also be interested in . . . |
The
ERS Briefing Room
on Corn.
The ERS
Feed Grains Database. |
The last 2 years were marked by
a flurry of construction activity in the U.S. ethanol
industry, as ground was broken on dozens of new
plants throughout the Corn Belt and plans were drawn
for even more facilities. As of February 2007, the
annual capacity of the U.S. ethanol sector stood
at 5.6 billion gallons, and plants under construction
or expansion are likely to add another 6.2 billion
gallons to this number (map). If this trend and
the existing and anticipated policy incentives in
support of ethanol continue, U.S. ethanol production
could easily reach 11 billion gallons in 2011, 7.3
billion more than the amount produced in 2005.
The tremendous expansion of the
ethanol sector raises a key question: Where will
ethanol producers get the corn needed to increase
their output? With a corn-to-ethanol conversion
rate of 2.7 gallons per bushel (a rate that many
state-of-the-art facilities are already surpassing),
the U.S. ethanol sector will need 4 billion bushels
per year by 2011—roughly twice as much as
it consumed in 2006. That’s a lot of corn,
and how the market adapts to this increased demand
is likely to be one of the major developments of
the early 21st century in U.S. agriculture. The
most recent USDA projections suggest that much of
the additional corn needed for ethanol production
will be diverted from exports and feed. However,
if the United States successfully develops cellulosic
biomass (e.g., wood fibers and crop residues) as
an economical alternative feedstock for ethanol
production, corn would become one of many crops
and plant-based materials used to produce ethanol
(see box, “That 70s Energy
Scene”).
Where Will the Corn Come
From?
Large corn stocks will enable
U.S. ethanol production to increase initially without
requiring much additional adjustment in the corn
market. The U.S. ended the 2005/06 Marketing Year
(MY—September 2005-August 2006) with stocks
of 2.0 billion bushels, enough to produce 5.3 billion
gallons of ethanol, and ending stocks declined by
only 143 million bushels between MYs 2004/05 and
2005/06. As long as corn is the primary feedstock
for ethanol in the U.S., however, sustained increases
in ethanol production will eventually require major
adjustments in the corn market.
One possibility is that ethanol
producers will secure the additional corn they need
by competing with other buyers in the marketplace
and bidding up the price of corn. Already, there
are signs that this is happening in the spot and
futures markets. According to the USDA projections
(released in February 2007), the share of ethanol
in total corn use will rise from 14 percent in 2005/06
to 31 percent in 2016/17. A comparison of the 2007
projections with the 2005 Baseline suggests that
much of the increased use by ethanol producers will
be diverted from potential exports; the 2007 projections
suggest much higher use for ethanol and lower exports
than the 2005 Baseline. Corn may also be diverted
from feed use.
If demand for ethanol reduces the availability of
U.S. corn for export, one might ask how this will
alter the geographical composition of U.S. exports.
The 2006 Baseline suggests that among the major
foreign buyers of U.S. corn, Japan and Taiwan are
likely to be the least responsive to a rise in corn
prices, while Canada, Egypt, and the Central American
and Caribbean region are likely to be the most responsive.
Japan and Taiwan both have relatively high per capita
incomes and limited corn production. In contrast,
Canada, another high-income country, has substantial
levels of corn production and could respond to higher
prices with increased output of corn, wheat, and
other feed grains. Per capita income in Egypt, Central
America, and the Caribbean is relatively low, and
higher prices may drive these countries to cut back
in corn use, increase domestic corn production,
or seek out substitutes. Egypt already produces
a sizable amount of corn.
Slower growth of U.S. corn exports
would create new opportunities for corn producers
in other parts of the world, including Argentina,
Brazil, and China. Another country to watch is Mexico,
where the price of tortillas increased by roughly
50 percent between June 2006 and January 2007 due
in part to greater tightness in the international
corn market. Irrigated lands account for about half
of the increase in Mexican corn production since
the late 1980s. Much of this increase has taken
place in the State of Sinaloa, where farmers are
applying advanced agricultural techniques to obtain
yields comparable to those in the United States.
Sinaloa, however, is relatively distant from corn-deficit
areas in Mexico, and many of these producers have
counted on marketing subsidies to offset some of
the transportation costs. Increased demand for corn
by U.S. ethanol producers might push prices high
enough that these transportation costs are more
easily surmounted.
Farmers May Increase Corn
Supply
The growing corn demand of ethanol
producers could also be satisfied through higher
corn output. Rising productivity is likely to assure
some increase in U.S. corn production in the years
to come, even if the amount of farmland devoted
to corn remains constant. Over the past decade (1997-2006),
U.S. corn yields averaged 140 bushels per acre,
compared with 116 bushels during the previous decade.
The United States also could increase corn production
by devoting more land to the commodity. Much of
these lands would probably be diverted from soybean
production, and some of these lands may be less
suited to corn production.
Growing corn more intensively
is yet another approach. For instance, some producers
who currently pursue a corn-soybean rotation (planting
corn one year and soybeans the next) might shift
to a corn-corn-soybean rotation (planting corn 2
years in a row and then planting soybeans in the
third). Continuous production of corn (planting
corn every year on the same plot of land) is another
possibility. Interestingly, one of the key factors
boosting ethanol demand—high oil prices—also
makes intensive corn production less attractive
because more fertilizer would be needed.
One way to get more ethanol feedstock
out of existing levels of corn production is to
use the stalk, leaves, and cobs left over after
harvest—materials that are formally known
as stover. An acre of corn will yield roughly 5,500
dry pounds of stover, enough to produce about 180
gallons of ethanol. In the United States, corn stover
is typically left in the field following harvest
to minimize erosion and to contribute organic matter
to the soil, so removing some of the stover at harvest
might adversely affect the long-term viability of
the soil.
Market Adjustments Extend
to Ethanol Co-products and Beyond
As ethanol production increases,
the supply of ethanol co-products will also increase.
Both the dry-milling and wet-milling methods of
producing ethanol generate a variety of economically
valuable co-products, the most prominent of which
is perhaps distillers dried grains with solubles
(DDGS), which can be used as a feed ingredient for
livestock. Each 56-pound bushel of corn used in
dry mill ethanol production generates about 17.4
pounds of DDGS. In the United States, cattle (both
dairy and beef) have so far been the primary users
of DDGS as livestock feed, but larger quantities
of DDGS are making their way into the feed rations
of hogs and poultry. Use of distillers grains in
animal production lowers the use of corn and protein
supplements (see box, “Emergence
of DDGS Market Creates New Need for Data”).
The marketing of ethanol co-products
is just one way in which ethanol producers are making
their operations more profitable. Another way is
to save energy by locating ethanol plants in close
proximity to dairy or livestock production. Specifically,
a dairy or livestock producer is able to lower the
transport costs associated with feed acquisition
by establishing a nearby facility to manufacture
ethanol and distillers grains. The latter may be
quickly transported to feed nearby livestock without
needing to be dried, and the manure generated by
the livestock can be used to produce heat or electricity
for the ethanol plant, but this entails a sizable
capital cost.
Closer integration of ethanol
production with other agro-industrial activities
is likely to displace some traditional marketing
and distribution channels for corn. Indeed, the
services of some grain elevators may no longer be
needed in some areas if local corn supplies are
used in their entirety for ethanol production. The
transportation sector may be the site of several
noteworthy adjustments, as the profitability of
the expanded ethanol sector will depend on economical
methods of handling the growing supply of ethanol
and its co-products, as well as the feedstock necessary
to produce them. Some large-scale ethanol plants
may find it cost effective to receive corn deliveries
by rail on specially constructed trunk lines, while
others may rely on truck, barge, or existing rail
lines, depending on the location of the facility.
The transportation of ethanol
requires special attention. Ethanol is usually not
moved across large distances by pipeline because
the product has the ability to absorb the water
and impurities commonly found in pipelines. Instead,
the product is customarily shipped in tanks by train,
truck, or barge, and then mixed directly with gasoline
in the tanker trucks that deliver fuel to gas stations.
With the growth of the U.S. ethanol industry, more
ethanol is now being shipped by rail over longer
distances. Between 2000 and 2005, rail shipments
of ethanol climbed from 40,000 to 82,000 in terms
of carloads and from 2.8 billion to 8.2 billion
in terms of ton-miles, according to the Association
of American Railroads.
New Feedstocks Are the
Wild Card
The search for ethanol feedstocks
will not stop at the edge of the corn field. While
corn is currently the primary feedstock for U.S.
ethanol production, many other agricultural commodities
and plant-generated materials can be used to produce
the fuel. For example, ethanol derived from sugarcane
satisfies roughly half of Brazil’s annual
demand for motor vehicle fuel, and sorghum is the
feedstock for about 3 percent of U.S. ethanol production.
The U.S. and many other countries
are very interested in cellulosic biomass as a potential
feedstock for ethanol. Cellulosic biomass refers
to a wide variety of plentiful materials obtained
from plants—including certain forest-related
resources (mill residues, precommercial thinnings,
slash, and brush), many types of solid wood waste
materials, and certain agricultural wastes (including
corn stover)—as well as plants that are specifically
grown as fuel for generating electricity. A report
prepared for the U.S. Department of Energy and USDA
in 2005 suggests that, by the middle of the 21st
century, the United States should be able to produce
1.3 billion dry tons of biomass feedstock per year—enough
to displace at least 30 percent of its current petroleum
consumption.
Harnessing cellulosic biomass
to produce ethanol will require the development
of economically viable technologies that can break
the cellulose into the sugars that are distilled
to produce ethanol. No one knows for sure how long
it will take to develop these technologies, although
the more optimistic predictions are in the neighborhood
of 5-10 years. To expedite the achievement of this
goal, the Energy Policy Act of 2005 directs incentives
specifically toward the use of cellulosic biomass
as a feedstock for renewable fuel. For the purpose
of meeting the Renewable Fuel Standard, 1 gallon
of cellulosic biomass ethanol is treated as 2.5
gallons of renewable fuel through the end of 2012.
The Act also provides for research, development,
and demonstration projects concerning cellulosic
biomass, and it firmly mandates that at least 250
million gallons of renewable fuel must be produced
per year using cellulosic biomass, beginning in
2013. Until cellulosic biomass is successfully commercialized,
however, corn will almost certainly remain the primary
feedstock for U.S. ethanol production.
That 70s Energy Scene
The factors behind ethanol’s
resurgence are eerily reminiscent of the 1970s
and early 1980s, when interest in ethanol
rebounded after a long period of dormancy.
First, the price of crude oil has been on
an upward trend since the late 1990s, due
in large part to strong demand from both wealthy
countries and rising developing economies
such as China. In 2006, the price of crude
oil averaged $60 per barrel, its highest real
level in over 20 years, although the price
has since fallen to around $53 per barrel
as of February 2007. Long-term projections
from the U.S. Department of Energy’s
Energy Information Administration (EIA) suggest
that the price of imported low sulfur light
crude oil will exceed $49 per barrel (in 2005
prices) throughout the period 2007-30 and
will approach $60 per barrel toward the end
of this period. It is important to remember,
however, that as the price of oil dropped
during the first half of the 1980s, so, too,
did ethanol’s profitability.
Second, many refineries
are replacing methyl tertiary butyl ether
(MTBE) with ethanol as an ingredient in gasoline.
Oxygenates such as MTBE and ethanol help gasoline
to burn more thoroughly, thereby reducing
tailpipe emissions, and were mandated in several
areas to meet clean air requirements. But
many State Governments have recently banned
or restricted the use of MTBE after the chemical
was detected in ground and surface water at
numerous sites across the country. In the
1970s and 1980s, a similar phaseout ended
the use of lead as a gasoline additive in
the U.S. Both ethanol and lead raise the octane
level of gasoline, so the lead phaseout also
fostered greater use of ethanol.
Third, the Energy Policy
Act of 2005 specifies a new Renewable Fuel
Standard (RFS) that will ensure that gasoline
marketed in the United States contains a specific
minimum amount of renewable fuel. Between
2006 and 2012, the RFS is slated to rise from
4.0 to 7.5 billion gallons per year. Assessments
of the existing and likely future capacity
of the U.S. ethanol industry indicate that
the RFS will easily be achieved. In his 2007
State of the Union address, President Bush
proposed the establishment of a broader Alternative
Fuel Standard (AFS) that would encompass corn
ethanol, cellulosic ethanol, biodiesel, methanol,
butanol, hydrogen, and other alternative fuels.
As part of his goal of reducing U.S. gasoline
consumption by 20 percent over the next 10
years, the President aims for the United States
to produce 35 billion gallons of alternative
and renewable fuels by 2017.
If implemented, the AFS
would join a long list of incentives that
the State and Federal Governments have directed
toward ethanol since the 1970s. One of the
most important of these incentives is the
Federal tax credit, initiated in 1978, to
refiners and marketers of gasoline that contains
ethanol. The credit, which may be applied
either to the Federal sales tax on the fuel
or to the corporate income tax of the refiner
or marketer, currently equals 51 cents per
gallon of ethanol used. |
Emergence of DDGS Market Creates
New Needs for Data
The growing supply of DDGS
has spurred demand for detailed market information
about this commodity, comparable to what exists
for other feedstuffs. USDA’s Agricultural
Marketing Service (AMS) already collects and
disseminates some information about this fledgling
market. The Corn Belt Feedstuffs weekly out
of St. Joseph’s, Missouri, provides
DDGS price information for a number of regional
markets; USDA and the Wisconsin Department
of Agriculture provide a weekly report containing
different DDGS price quotes for Wisconsin
and Eastern Minnesota based on different moisture
levels of the product; the Illinois report
for the eastern Corn Belt includes data about
the DDGS market; Iowa Ethanol Corn and Co-Products
Processing Values compares the price of corn
with the value of processing products for
Iowa ethanol plants; and the Nebraska Ethanol
Plant Report describes the freight-on-board
price of distillers grains with solubles.
Finally, the Illinois Ethanol Report was unveiled
in March 2007. |
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