U.S. farmers could plant 94 million acres of corn in 2008 as more refineries come on line to meet the growing demand for ethanol, a study conducted by Iowa State University's Center for Agricultural and Rural Development says.
If higher crude oil prices continue to propel use of alternative fuels, U.S. corn growers could be planting as much as 112 million acres by 2016, or nearly half again as many as in 2006, the study said.
The diversion of more acres to corn-based ethanol is already having an impact on food prices with consumers paying an additional $14 billion or $47 per person per year, according to the report commissioned by the American Meat Institute, the National Grain and Feed Association and several livestock producer organizations.
The increase could be even greater if crude oil prices climb to the study's “high-price scenario” of $65 to $70 per barrel and remain there.
“If long-run equilibrium corn prices were to increase to $4.42 per bushel (under the high-price scenario), retail food prices for beef, pork and poultry would increase by 6.8 percent, 7.5 percent and 8.5 percent,” said Bruce Babcock, CARD's director.
“Given that total U.S. food expenditures total $1.1 trillion, the total food price impact of corn-based ethanol would equate to about $20 billion annually for U.S. consumers under this scenario.”
The study shows the United States is near the “tipping point” when it comes to the development of the biofuels industry, said Babcock. (Iowa has become one of the leading ethanol-producing states with 27 plants in operation and 30 more in the construction or planning stage.)
Its findings are based on two distinct scenarios:
Under a “base scenario,” with crude oil prices ranging from $55 to $60 per barrel, the study projects U.S. ethanol could plateau at around 15 billion gallons annually.
Under a “high-price crude oil scenario,” with crude oil prices ranging from $65 to $70 per barrel, the study finds ethanol capacity has the potential to expand to nearly 30 billion gallons annually.
“The study also projects increased use of corn for ethanol production will have ripple effects throughout world commodity markets,” said Babcock. “Under the high-price crude oil scenario, the study projects 15 percent of total world wheat and coarse grain production would be utilized for ethanol, further reducing already tight global grain supplies.
“Under the high-price crude oil scenario, the study projects the United States would utilize more than 50 percent of its total wheat and coarse grain production for ethanol.”
Besides a 40 percent increase in U.S. corn prices, a high-price crude oil scenario could also raise Canadian feed barley prices by 26 percent and world soybean prices by 22 percent. U.S. domestic wheat prices are projected to increase by 23 percent, Australian wheat prices by 16 percent and European Union prices by 7 percent.
Livestock producers have been expressing concern about the new “gold rush” to corn-based ethanol since corn futures jumped to $4 per bushel after USDA forecast a smaller than expected corn harvest last fall.
“We recognize the importance of the United States diversifying its energy sources to enhance energy security,” said J. Patrick Boyle, president and chief executive officer of the American Meat Institute. Boyle, Babcock and others spoke at press briefing on the CARD study May 17.
“But this study clearly shows we are reaching a tipping point and that over-reliance on corn-based ethanol to meet stringent government mandates would further drive up retail food prices, reduce domestic meat and poultry production and erode our vital meat and grain export markets.”
The study projects farm gate corn prices will range from $3.16 per bushel under the base crude oil price scenario to $4.42 per bushel under the high-price. The latter could push corn plantings up 44 percent from last year's 78 million acres to 112.3 million.
Babcock said economists are uncertain about how high corn prices would have to be to sustain corn plantings at the 112 million acres the study says would be needed to produce 30 billion gallons of ethanol annually by 2016.
“That uncertainty is caused by the fact that prices of other competing crops would be expected to increase dramatically to vie for limited acreage available for crop production, and because the United States has never experienced the market impacts of such a large, permanent, corn-price increase,” he noted.
“If U.S. corn prices increase to even greater-then-projected levels, retail cost impacts on meat, milk and eggs could be greater than projected in the study.”
The study projects U.S. corn exports could decline from this year's 2.4 billion bushels to as low as 911 million bushels — under the high-price crude oil situation. That would be a decline of 63 percent.
Soybean planted acres would be expected to fall from 75 million to 68.4 million if crude oil prices remain in the moderate range and 57.3 million if they move higher. Season-average soybean prices could rise from $6.10 per bushel in 2006 to $7.25 per bushel by 2008 and even higher — $8.07 per bushel — with high crude oil prices.
U.S. soybean exports would decline by about 300 million bushels to 594 million — a 33 percent drop. Wheat acres could decline to between 42 million and 57 million acres and exports fall to between 1 billion and 483 million bushels. Wheat prices could range from $4.29 to $5.27 per bushel.
“There is virtually no leeway for supply disruptions or other anomalies, given that the study projects year-ending corn stocks would range from 400 million to 800 million bushels,” said Babcock. (Market analysts consider 400 million bushels to be less than pipeline supply levels.)
“Any supply disruptions from drought-reduced yields, shifts in cropping patterns in the United States or a major foreign grain-producing country could result in major ripple effects on multiple user sectors, ranging from livestock liquidations to adverse impacts on grain-processing sectors to steep reduction in grain exports.”
That could bring on a lot of heartburn for the National Grain and Feed Association, according to its president, Kendell W. Keith.
“Biofuels offer U.S. agriculture a way to diversify its markets,” he said. “But this study shows that any supply disruptions in the United States or other major foreign grain-producing countries could result in ripple effects on multiple users in the short run.”
CARD economists analyzed the economic feasibility of using corn stover or switchgrass as ethanol feedstocks under “reasonably optimistic” assumptions about the technology forecasts for conversion rates.
“The study concludes that neither of these feedstocks appears likely to come into widespread use, due to conversion, handling, logistics and capital costs and constraints,” said Babcock. “We conclude that in U.S. corn-producing regions, switchgrass would make economic sense “only if it receives and additional subsidy that is not provided for corn-based ethanol.”
The release of some Conservation Reserve Program acres could also help alleviate some of the financial stress on livestock producers — during the early years of rapid ethanol growth — and mitigate short-term supply disruptions such as those caused by drought, Babcock notes.
“However, it finds that CRP acres would not alleviate future possible supply shortages in basic crop commodities. A moderate increase (7 million acres) in current CRP land being shifted to crop production could have a mild tempering effect on long-term constrained supplies of basic commodities, resulting in a 1 percent increase in corn supplies.”
The economists anticipate that more corn would be planted in the Southeast as prices move higher. “It might be even higher than we're forecasting because when we conducted the study last fall we didn't expect cotton plantings to drop as much as they have,” said Babcock.
“The South will increase at a higher percentage than elsewhere, but the total will be lower than in the traditional Corn Belt.”