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; Steven
Zahniser
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Work
is underway to add over 2 billion gallons
to the annual capacity of the U.S. ethanol
sector. |
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To
meet the sector’s growing demand
for corn, some U.S. corn is likely to
be diverted from exports. |
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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. |
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This
article is drawn from . . . |
Feed
Outlook, by Allen Baker and Edward
Allen, FDS-05j, USDA, Economic Research Service,
November 2005
USDA Agricultural
Baseline Projections to 2015, Paul Westcott,
ERS Contact, OCE-2006-1, USDA, Office of the
Chief Economist, World Agricultural Outlook
Board, February 2006
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 year 2005 was marked by a flurry
of construction activity in the Nation’s ethanol
industry, as ground was broken on dozens of new
plants throughout the U.S. Corn Belt and plans were
drawn for even more facilities. As of February 2006,
the annual capacity of the U.S. ethanol sector stood
at 4.4 billion gallons, and plants under construction
or expansion are likely to add another 2.1 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 reach 7 billion gallons in 2010, 3.3 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 2.6 billion bushels
per year by 2010—1.2 billion bushels more
than it consumed in 2005. 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 Baseline Projections suggest that
much of the additional corn needed for ethanol production
will be diverted from exports. However, if the United
States successfully develops cellulosic biomass
(wood fibers and crop residue) as an economical
alternative feedstock for ethanol production, corn
would become one of many crops and plant-based materials
used to produce ethanol (see “That
70s Energy Scene”).
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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 risen to
its highest real level in over 20 years, averaging
more than $50 per barrel in 2005. 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 $46 per barrel (in 2004
prices) throughout the period 2006-30 and
will approach $57 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 United States. 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. The
RFS joins 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 containing
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. |
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 2004/05 marketing year
(MY—September 2004-August 2005) with stocks
of 2.1 billion bushels—enough to produce 5.7
billion gallons of ethanol. As long as corn is the
primary feedstock for ethanol in the U.S., however,
sustained increases in ethanol production will eventually
require 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. According to the
USDA Agricultural Baseline Projections (released
in February 2006), the share of ethanol in total
corn use will rise from 12 percent in 2004/05 to
23 percent in 2014/15. A comparison of the 2006
Baseline with the 2005 Baseline suggests that much
of the increased use by ethanol producers will be
diverted from potential exports; the 2006 Baseline
projects higher use for ethanol and lower exports
than the 2005 Baseline.
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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 irrigated lands have accounted for about half
of the increase in domestic 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 (1996-2005),
U.S. corn yields averaged 138 bushels per acre,
compared with 115 bushels during the previous decade.
The United States also could increase corn production
by devoting more land to the commodity. Such an
effort would probably draw upon lands less suited
to corn production. Much of these lands would probably
be diverted from soybean 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 distiller’s 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 distiller’s grains
in animal production lowers the use of corn and
protein supplements (see “Emergence
of DDGS Market Creates New Needs for Data”).
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.
Josephs, 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. And in February, AMS unveiled a new
Illinois
report for the eastern Corn Belt that
includes data about the DDGS market. |
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 distiller’s 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 agri-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.
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 sugar
cane 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 mandates that at least 250 million
gallons of renewable fuel 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.
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