Balancing Act

By Jeanne Bernick

11/10/2007

The booming U.S. ethanol industry is creating a wave of prosperity for rural towns like Ord, Neb. Local farmers used to seeing farm foreclosures and shuttered businesses have new hope in Val-E Ethanol, a facility consuming 16 million bushels of their annual corn production. As a result, ethanol has lifted local grain prices and infused new life into this small Nebraska community.
 

But a win for Ord, Neb., corn growers may be the export market’s loss. As the ethanol industry absorbs a larger share of the U.S. corn crop, higher prices are providing intense competition between domestic users and foreign buyers.
 

The U.S. typically supplies 60% to 70% of the world’s corn exports, but this share is projected to drop  to 55%, USDA reports. Many agricultural organizations, including the Food and Agricultural Policy Institute (FAPRI), expect ethanol to flatten  export levels or even cause a decline in the long term—a major break from past projections.

The record 2007 corn crop so far is supporting expansion of both ethanol and exports. Ethanol will use about 1 billion bushels more of the nation’s corn than last year, or a total of 3.4 billion bushels out of the projected 13.3-billion-bushel crop, reports USDA. Meanwhile, exports are projected to be the largest in 18 years at 2.25 billion bushels, driven by tightening world grain supplies, robust world feed grain consumption and less export competition from Brazil and China.
 

Still, concern is brewing that “something’s gotta give” in the U.S. corn market. Will ethanol steal needed corn away from exports?   
 

“The growing ethanol industry has been critical to corn producers’ profitability, but a diverse customer base is essential to the long-term success of U.S. farmers,” believes Ken Hobbie, president and CEO of the U.S. Grains Council. After all, 27% of U.S. farmers’ income is still derived from exports, according to USDA.

Reason for concern. With 85 construction projects underway, the Renewable Fuels Association says that if all the projects are completed by 2009, production nearly doubles and so should total corn-for-ethanol use.
 

USDA did lower its estimate of corn use for ethanol in the current marketing year by 100 million bushels, citing a slower-than-expected start-up pace for new ethanol plants.
 

“That 100-million-bushel decline would be worrisome and even detrimental to corn growers if export markets were not expected to consume an additional 100 million bushels,” says Hobbie.
 

If only a quarter of the ethanol plants currently proposed in the Midwest come online, and if corn needed to supply these plants and others is diverted from exports, Midwest corn exports could be cut in half, reports the Institute for Agriculture and Trade Policy (IATP).
 

In Nebraska, for example, corn needed for ethanol could exceed corn for exports out of the state if only a fraction of its proposed ethanol plants come online (see chart, page 18), making Nebraska a net importer of corn, predicts IATP.
 

“Within the next four to five years, the U.S. corn-based ethanol industry may use an annual volume of corn equal to 160% of current global corn exports,” says Bob Wisner, Iowa State University ag economist.
 

Added capacity of corn-based ethanol plants currently under construction is already nearly four times the volume of U.S. corn exported annually to Japan, he says. The increase in capacity under construction represents a volume of corn 15% larger than the record EU crop.
 

“To be clear, there are limits on how much corn we can and should use for ethanol,” says Brian Jennings, executive vice president of the American Coalition for Ethanol. “But the corn supply is not static. The most fundamental flaw of those suggesting a corn supply Armageddon is underestimating the unparalleled capabilities of U.S. farmers.”
       
Can farmers respond? If demand for corn remains high and projected revenue per acre is strong relative to other crops, farmers will plant more corn—and they already have, says Rick Tolman, CEO of the National Corn Growers Association.
 

Rising yields will help. Virtually all growth in U.S. ag output over the past 50 years can be explained by productivity growth, says Roger Conway, director of the Office of Energy Policy and New Uses at USDA. “Since 1948, corn yields have increased fourfold,” he says.
 

USDA estimates the national average corn yield this year at 156 bu./acre, and corn yields are on track to double in 20 years, adds Tolman. Monsanto projects an average corn yield of 300 bu./acre by 2030.
 

On this year’s acreage, just a 2-bu./acre yield increase provides an additional 403 million gallons of ethanol. And shifting 1 million acres of land to corn provides enough grain for 420 million gallons of ethanol.
 

DuPont/Pioneer projects that because of yield increases and new ethanol technologies, such as cellulosic ethanol made from corn stover, we will go from a yield of 430 gal. of ethanol per acre from corn now to over 1,000 gal./acre by 2020.
 

Cellulosic ethanol, which uses other parts of the corn plant instead of the starch in the kernel, will also help offset corn demand. An acre of corn yields enough stover to produce about 180 gal. of ethanol.
 

The problem is that no one knows for sure how long it will take to develop cellulosic technologies, although optimistic predictions say 5 to 10 years.
 

Finally, using distillers’ grains as feed frees up 1.8 billion bushels of corn for ethanol production,  equal to 5 billion gallons of ethanol.
 

“These projections show why we are not concerned at all about being able to satisfy both a growing biofuels and a growing export market,” says Tolman. “In fact, we need both to keep growing.”
 

Still, some economists believe there we will reach a breaking point. Once the size of the ethanol industry reaches about 22 billion gallons, the U.S. will no longer have a surplus of corn to export, says Chad Hart, an Iowa State University ag economist.
 

“This does not mean that current corn-importing countries will face a scarcity of corn,” says Hart. “It does, however, mean that they will source their corn from countries such as Argentina, which has the capacity to expand corn production.”

Embargo? Many question whether the long-term impact of ethanol and export demand amid short corn supplies and high prices will result in an embargo on U.S. exports, such as occurred with soybeans in 1973.
 

Such an embargo might be considered following a large shortfall in production, but the potential negative impact on longer-term trade relationships would make that policy choice a very unpopular alternative, says Darrell Good, University of Illinois ag economist.
 

More likely, the financial implications of high corn prices for livestock producers would evoke supply issues between domestic livestock producers and processors, Good says.
 

Analyst Randy Martinson of Progressive Ag, West Fargo, thinks the corn industry needs to look at what the ethanol industry is asking it to provide. Does the U.S. want enough corn raised to supply E10 or E15 across the nation? he asks. If that’s the case, then enough acres will have to be devoted to corn production to meet that need, he says.
 

Right now, the U.S. is engaged in a honeymoon with ethanol, says Terry Barr, chief economist and vice president of agriculture and trade policy for the National Council of Farmer Cooperatives. But Barr believes it won’t be long before U.S. agriculture comes back and asks: Where do we find demand?
 

“Ultimately, trade is going to be the driver for corn demand,” Barr says. “To grow our domestic industry, we have to export. Now is the time to maintain export markets that we will need in the very near future, and not count solely on ethanol.”
 

Nationally, nearly one out of every five bushels of corn in the 2007 market year was exported across the globe, adds Hobbie. “Just think about what would happen to the farmer’s bottom line, and to the farm economy, if all that corn had to stay in a bin,” he says.

Who Will Serve the Growing Export Market?

If demand for ethanol reduces the availability for corn exports, it could alter the geographical composition of our shipments. 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 America and Caribbean regions are likely be the most responsive, according to Paul Wescott, economist with USDA’s Economic Research Service.
 

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 production and could respond to higher U.S. prices with increased output of its own.
 

Mexico has increased demand for U.S. corn despite higher prices, accounting for 40% of the year-over-year increase in export sales of U.S. corn for 2007.
 

Competition is rising in the export market, and slower growth of U.S. corn exports would create new opportunities for  producers in Argentina, Brazil and China.
 

Argentina, with a small domestic market, remains the world’s second largest corn exporter. Its acreage planted to corn will increase, as its exports steadily rise by more than 60%, to 21 million tons by 2012, according to USDA.
 

USDA predicts Brazil will continue targeting niche markets  for nongenetically modified grain. However, strong growth in domestic demand from its livestock sector and the profitability of growing soybeans will likely limit growth in corn exports.
 

China is also expected to increase its corn production. But feed and industrial use, especially for starch, is also expected to grow robustly. As consumption grows, China is projected to increase imports and reduce exports, and to eventually become a net corn importer by 2012.
 

While the push for domestic renewable energy is the “biggest thing” to benefit U.S. farmers since the Russian trade deal, agriculture can’t ignore trade opportunities, sums up Michael Yost, administrator of USDA’s Foreign Agricultural Service.
 

“Don’t put all your eggs in one basket,” he warns farmers. “Don’t turn your backs on the international marketplace. Do we want this country to sit on the sidelines and watch others have a competitive edge?”

To contact Jeanne Bernick, e-mail jbernick@farmjournal.com.