If it seems like nearly everyone is jumping on the ethanol bandwagon lately, that's because they are. The number of U.S. plants now producing the liquid gold topped 100 this spring, and nearly 50 more plants are in the planning and building stages. Ethanol production has doubled in the last four years and is projected to double again over the next four years, according to the Department of Energy's Information Administration.
Market analysts admit they can hardly keep track of the industry's rapid growth. Economists at the University of Missouri's Food and Agricultural Policy Research Institute (FAPRI) recently updated their estimates of the amount of corn necessary to meet the needs of ethanol plants in 2006-2007, increasing it to 2.15 billion bushels, up from 1.6 billion bushels this year.
To meet that growing need, farmers will likely shift some soybean acres to corn, analysts predict. How many acres is a point that's still being debated. According to the latest FAPRI projections for the Corn Belt states of Missouri, Iowa, Illinois, Indiana and Ohio, acreage is now evenly split between corn and soybeans — at 36 million acres each. But by 2010, the number of soybean acres will drop to 33 million, according to estimates, because corn prices are projected to increase to $2.69/bu.
High oil prices and government subsidies for biofuel production have been major factors spurring industry growth, notes Robert Jolly, Iowa State University farm management specialist. “As long as oil prices remain high, we'll see continued investment in ethanol. And oil prices don't look like they'll be coming down anytime soon,” he says. “When you can buy corn for $1.70 a bushel and sell ethanol for almost $3.00 a gallon, it's easy to understand why everyone is jumping into the market.”
Too profitable to resist
Roger Price, general manager of Farmers Cooperative Company, based in Hinton, IA, says the ethanol industry is becoming so lucrative that his co-op needs to be involved. “We didn't want to wake up one day and realize that all the business was going by us,” he says.
This past spring, the board of this northwestern Iowa cooperative decided to form a limited liability company called Floyd Valley Ethanol and build a 100-million-gallon plant in Hinton. Working with Washington-state-based ethanol plant developer Baard Renewables, the cooperative plans to fund plant construction through local investors and its own financing.
A plant of this size is typical of those being built around the Midwest and is estimated to require 38 to 40 million bushels of corn annually. In the case of Iowa's Plymouth County, where Hinton is located, that number must be multiplied by three to arrive at the increased demand for corn projected for that county, alone, within two years. That's because the Floyd Valley plant is one of three now in the planning process; other plants are slated to be built in nearby Akron and Merrill.
Increasing the demand for corn in that one Iowa county by as much as 120 million bushels a year provides evidence of the major impact the ethanol boom is having on grain movement patterns around the Midwest. “It's already started to happened but will become more dramatic as ethanol plants are built and come online in the next few years,” Price notes. “Grain elevators like ours need to find our role in it all.”
Three years ago, in an effort to gain greater efficiencies in its grain division, the Hinton cooperative formed a limited liability company with processor AGP and built a 110-car load-out facility. Although the new company has met its grain volume goal this past year, Price says it will likely be filling some of those trains with ethanol by-products such as distiller's grains, as well as the ethanol itself, once the plant goes online.
There are more users competing for corn now, but those markets where grain went before all the ethanol plants sprung up aren't going to go away. “It may have the effect of moving more livestock closer to ethanol plants, though,” Price says.
A trucking trade-off
With less corn being hauled to the major grain hubs like Minneapolis, Omaha and Kansas City, the distribution of some crop inputs will be affected, notes Bruce Vernon, head of crop nutrient marketing for Agriliance. “Trucks used to haul grain into the Twin Cities and haul fertilizer back out to the country, for instance. Now, if there are fewer trucks hauling grain in, that could impact the logistics and freight costs of moving our products to the country,” he says.
These changing market forces point to the value of timing your crop nutrient buys, Vernon continues. “With the supply chain lengthening and 64% of this country's nitrogen coming from imports, it's becoming more important for producers to start thinking about the purchases way in advance of the application season. We're selling a lot of forward contracts for crop nutrients up to 14 months in advance of when they'll actually be needed.
“Farmers have gotten used to the idea of forward pricing their crop and locking in a price,” he continues. “Now they need to be thinking in the same way about inputs.”
Shift to more corn?
The reality of higher input costs with corn will keep many farmers from significantly changing their cropping patterns, Jolly predicts. “With corn prices in their current range, it's not profitable to go to corn on corn,” he says.
This summer, he and ISU colleague Robert Wisner and graduate student Josh Roe ran the numbers of a typical Iowa farm in a 50-50 corn-soybean rotation and what it would take in order to make switching to continuous corn profitable (see chart). The short answer is $3.00 corn, and that is based on $5.15 soybean prices. “When you figure in the added input costs with corn, the current high fertilizer prices, and the 10% yield penalty, it just doesn't pencil out,” Jolly says.
“I really don't expect a major shift to more crop acres in the next year or two,” he says. “And I don't think we'll see a major impact on crop inputs next year.”
Not all hybrids are equal in the ethanol process. They differ in the amount of total fermentable starch that they contain and can vary up to 7% from one hybrid to the next, explains Joe Foresman, senior marketing manager in biofuels for Pioneer Hi-Bred International.
“We have evaluated all our hybrids and identified 135 of them that have characteristics most favorable to the dry mill process of ethanol production,” he says. “Of our 20 best-selling hybrids, 17 of them are HTF [high total fermentable starch] hybrids. They produce slightly more ethanol per bushel, with no yield trade-off.”
Processors don't offer any premiums for these hybrids, but their interest in the value they offer to the ethanol industry seems to be growing. “We are definitely getting more interest in the HTF hybrids from producers and will continue to screen our existing and future hybrids for this characteristic,” Foresman says.
He adds that, if farmers do switch to more continuous corn cropping patterns, choosing hybrids with good early vigor and the right defensive traits will be critical in seed selection.
|Corn after soybeans (180-bu./acre yield)||Corn after corn (162-bu./acre yield)|
|Government payments||$ 32.32||$ 32.32|
|Total cash inflows||$446.32||$404.92|
|Fuel, lubric., repairs||$ 4.52||$ 10.10|
|Seed||$ 39.00||$ 45.00|
|Nitrogen||$ 48.77||$ 68.57|
|Phosphate||$ 23.63||$ 22.94|
|Potash||$ 12.02||$ 11.06|
|Lime||$ 6.00||$ 6.00|
|Herbicide||$ 34.71||$ 32.00|
|Insecticide||$ 0.00||$ 15.00|
|Crop insurance||$ 7.00||$ 7.00|
|Hired labor||$ 2.45||$ 4.54|
|Interest||$ 7.25||$ 9.05|
|Total preharvest variable costs||$185.35||$231.28|
|Fuel, lubric., repairs||$ 8.07||$ 8.07|
|Drying costs||$ 31.10||$ 27.99|
|Total harvest variable costs||$ 39.17||$ 36.06|
|Total variable costs||$224.52||$267.34|
|Source: Josh Roe, Kansas State University; Robert Jolly and Robert Wisner, Iowa State University|