USDA's chief economist sees a continuation of the ethanol boom over the next few years, with more ethanol production plants coming on line and bigger corn crops needed to feed them. Long-term, ethanol's future will depend largely on policy decisions on tax credits and perhaps the growth of cellulosic ethanol.
Keith Collins speaking at the Farm Foundation's Biofuel, Food and Feed Tradeoffs conference in St. Louis, says one thing is sure for the next few years — there's money to be made in biofuel
“The value of U.S. crude oil imports is $220 billion a year and the total value of U.S. crop production is $134 billion. That ought to tell you that if you can get a slice of those crude oil imports, you can have a real jolt for crop production in the United States.”
Collins noted that the share of corn going to ethanol remained steady at about 5 percent a year from the early 1990s to the early 2000s, then began a steep climb. For the current marketing year, USDA is estimating almost 20 percent of corn production will be needed to produce about 5.9 billion gallons of ethanol. “For 2007-08, our estimate is 8.8 billion gallons, a 3 billion-gallon increase in one year, with the share of the corn crop going to 27 percent.
“I can remember back in September when we estimated that there were 142 ethanol plants in operation or under construction with a total capacity of 7.7 billion gallons. The most recent estimate is 201 ethanol plants with a total capacity of 12.1 billion gallons. That's an increase of over 4 billion gallons just in the last six months.
“To satisfy the expansion will take 10 million acres of corn. That tremendous demand for corn is what's causing the interest and the reaction in the agricultural commodity markets.”
This reaction has come primarily in the form of higher prices. Collins noted that in 1996, when the market recorded a high for corn prices of $3.20 per bushel, “we had a stocks-to-use ratio of 19 percent. This year, we're projecting 12 percent. This raises an interesting question of how low can stocks go, and what happens to prices if we have bad weather this season.”
Higher market prices prior to planting did what they were supposed to do this spring, noted Collins, enticing U.S. producers to announce intentions to plant 90.5 million acres of corn, the highest level since 1944.
On the other hand, a side effect of higher corn prices is that some feed purchasers balk at buying, which weakens demand. This impact was seen in a recently released stocks report indicating higher corn stocks and lower feed use than anticipated. Likewise, wheat stocks turned out to be lower than expected because wheat feed use was higher as purchasers looked for a cheaper feed grain.
Collins noted that corn used for ethanol is expected to climb from 2.15 billion bushels to 3.25 billion bushels in 2007-08, while corn carryout may climb to around 1 billion bushels, a number which should be reflected in USDA's May supply and demand estimate. This compares to a March projection of 670 million bushels. If the larger projection holds true, it will take a lot of the pressure off the corn market for this year. “The needs of the corn market will be readily met in 2007-08, assuming trend yield.”
Soy biodiesel is making a splash on the scene as well, noted Collins. “Our forecast is for 500 million gallons of soy biodiesel to be produced in 2007-08, using 17 percent of the soy oil production.”
Collins expects soy biodiesel production to reach 700 million gallons annually by 2016-17, with a requirement for 23 percent of the soy oil production.
Assuming current policies remain in place, USDA projects that by 2016-17, 30 percent of the corn crop will be used to produce 12 billion gallons of ethanol, “which many people say is a conservative estimate.”
USDA baseline projections to 2015-16 indicate higher prices for corn through 2009, before they begin trending down, “reflecting a tapering off in growth of ethanol production and the assumption that yield increases in corn will finally be enough to take care of the growth in demand.”
Collins pointed out that the ethanol-corn price spread — the rack price of wholesale ethanol multiplied by the number of gallons from a bushel of corn (2.75) minus the bushel price of corn — reached in excess of $8 a bushel in 2006. “The point at which the spread is profitable is about $1.40 a bushel. We've been consistently above that since mid-2005.”
Ethanol-corn price spread projections under three alternative ethanol price scenarios show that the spread remains very profitable as long as the ethanol price can maintain a price premium to gasoline. “Under that scenario, we'll continue to pour concrete and build plants like crazy. If the price of ethanol falls to the price of gasoline, due to a lowering of the tax credit among other factors, the spread is still profitable, but is closer to breakeven.”
A third scenario, pricing corn ethanol at the British thermal unit (Btu) value of gasoline, which would come about by eliminating the tax credit for ethanol and having ethanol go beyond the blend market and be competitive with gasoline on an energy basis, is not profitable given current technology.
Challenges facing biofuel expansion include the uncertainty about the direction of oil and gasoline prices, the need for more crop acreage and higher yields, according to Collins. “Also as costs of cellulosic ethanol come down, there will be less pressure on feed crops, particularly if we use crop residues and forest materials.”
Policy issues, such as tax credits or the potential for caps on certain blends of ethanol could also have a significant impact on ethanol production. “If a regulatory cap is placed on a 10 percent blend, as we increase production at a rapid pace, where would the demand come from as we push toward the cap?”
There are also concerns with livestock feed costs as well as meat and consumer food prices. Environmental issues may crop up — such as water quality, water quantity for irrigating corn and wildlife concerns relating to possible early release of land from the Conservation Reserve Program, Collins said.