Corn Ethanol's Success Sparks New Uncertainty in Farm Country
Once upon a time, corn prices and farm-belt profitability depended largely on weather and government support programs that cushioned weather-driven price shifts. The arrival of corn-based ethanol has changed that picture dramatically. It’s a change affecting not just farmers but “the seed industry, grain elevators, food processors, suppliers of fertilizer, trucking firms, non-ethanol grain and oilseed processors, farm machinery manufacturers and dealers, railroads, livestock producers, agricultural lenders, and other businesses closely associated with the crop sector.”
In an August AgMRC Renewable Energy Newsletter article, Iowa State University Energy Economist Robert Wisner makes it clear that watching the weather was a cinch compared to understanding how corn, ethanol and crude oil prices interact.
Wisner points out that up to three years ago when corn use for ethanol was less than 15% of total U.S. corn use, “the ethanol sector could have a large annual percentage growth with only a minor impact on corn prices.” What’s changed is that ethanol consumes about one-third of the U.S. corn crop today and, Wisner says, “Within three years, demand for corn for ethanol may well exceed the traditional largest source of demand for corn – livestock feeding.” He says this ethanol success story “has transformed Midwest agriculture from a sector that experienced excess production capacity, low prices, and government income supports to a growth sector with frequent periods of tight supplies even with good crop yields.”
Ethanol’s rise to power also means that “With the current large size of the ethanol industry, corn prices have become closely related to crude petroleum and gasoline prices because corn is now a major energy crop.” This change includes a further layer of uncertainty because ethanol is hitting the E10 “blend wall” – the federal limit of a 10% ethanol blend for most cars, with E85 blends only allowed for the small fleet of flex-fuel vehicles. Wisner says the blend wall “limits the market for ethanol, thus tending to depress its price relative to gasoline.” He forecasts that unless the U.S. EPA decides to authorize the higher E12 or E15 blends that ethanol boosters seek, ethanol prices may continue dropping relative to gasoline, slowing ethanol industry expansion and putting downward pressure on corn prices.
To read the complete “Corn, ethanol and crude oil prices relationships – implications for the biofuels industry” article which includes price charts, click here.
For additional resources, visit the Agricultural Marketing Resource Center (AgMRC), a virtual value-added agriculture center operated by Iowa State University and partially funded by the U.S. Department of Agriculture (USDA), at: http://www.agmrc.org/.