Ethanol, a finite idea.

Published on: 11:48AM Jan 04, 2011


As I write, exports are a big news item. China has been buying up soybeans at a rate that makes people wonder if we are going to run out of beans. The strong global buying interest for our commodities has everyone excited. However, if you want to look at an impactful trend for the last decade, it really boils down to ethanol.
Corn exports have been roughly 2 billion bushels for almost a decade. Sometimes they run up to 2.6 billion, and sometimes they drop down to around 1.5 billion. All in all, there isn’t much of a trend to the export data. Corn exports move mostly sideways, with an average of about 2 billion bushels.
On the other hand, ethanol has come on in the last five years or so, amounting to nearly 5 billion bushels of demand. That is, on average, double what we are exporting. And, it’s the equivalent to us having doubled our livestock herd. In other words, ethanol demand equals feed demand. It used to be that we produced about an 8-billion-bushel crop, and half of it would go to feed. Now we have a 12-billion-bushel crop, and one-third goes to feed, one-third goes to ethanol and one-third goes everywhere else.
Ethanol has the potential to be explosive, economically speaking. Ethanol demand is gigantic, and it is driving our supply-demand balance for corn. Despite this, our government could change the rules overnight, and ethanol production could be put out of business. Consequently, corn prices could collapse in the blink of an eye.  If our government doesn’t put the squeeze on ethanol production, high corn prices could shut down the plants, as we witnessed in 2008. We could go from projecting no carryover to projecting billions of bushels of carryover with just the swipe of a pen in Washington.
While I love agriculture, America, and profitability for agriculture in America, I also believe that in the long-run, ethanol is not likely to be a lasting demand source. Science is beginning to prove what I believe: It doesn't make sense to be using our resources and  tilling our fields to produce energy when there are so many other ways to produce energy that are renewable, and, in the long-run, likely less costly.
Consider wind, wave, geothermal and nuclear energy sources. There are many choices. Whether we are making ethanol from corn or some other crop, we are taking acreage away from producing food—food our people and the world’s people need. The challenge of feeding the world is an undertaking that likely will never cease to exist. As long as people live on Earth, there is going to be demand for food.
Food demand is a topic unto itself for another day. For now, I’m simply pointing out the significant economic impact ethanol has had and will continue to have—negative or positive. It’s only a matter of time before change comes—whether in the form of our government putting the squeeze on ethanol production or global triggering events such as technology advancements or governmental mandates—prompting a shift in the way we produce energy.
The great uncertainty that surrounds ethanol underscores how little confidence you can have in a price outlook approach. If you can’t consistently predict market-altering events—and nobody can—then you need to be prepared for the possibilities. As you have read often in this blog—and will continue to see!—I encourage you to take a scenario planning approach to your marketing. Rather than focus on where price may go, prepare for whatever the market may do.
Scott Stewart is president and CEO of Stewart-Peterson, a commodity marketing consulting firm based in West Bend, Wis. You may reach Scott at 800-334-9779, email him at [email protected].
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