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Corn Producers See Continued Strong Demand
By
Laura Skillman
 PRINCETON,
Ky., (Nov. 8, 2006) – Demand for corn to produce ethanol
continues to escalate, making the commodity’s outlook for the
next few years a rosy one, said a University of Kentucky College
of Agriculture grain marketing specialist.
Within-season corn prices could fluctuate as much as $2.50
between the low and the high over the next two years, and prices
could set a new all-time high within the next one to two years,
said Steve Riggins, UK agricultural economist. The previous
record high price of $5.50 was set 10 years ago.
“Most of that action will occur after the first of January,” he
said. “What the market is trying to do right now is to choke
back consumption from the projected all-time corn demand to try
to preserve some for the 2006 crop that’s left and carry it into
2007.”
Riggins said the industry is in a period of unprecedented change
with an entirely new type of demand being developed – the energy
market. As the demand for corn-for-ethanol production increases,
it competes with existing markets for the commodity,
particularly livestock feed and exports. Those markets continue
to be strong as developing countries, especially China, add more
meat to their diets.
Ethanol production isn’t likely to slow down without substantial
increases in corn prices and decreases in crude oil. However,
high corn prices could cause some livestock producers to look
for other alternatives.
Because of high demand, the amount of corn on hand is low and
could reach record lows. Corn usage is expected to be more than
12 billion bushels next year and that’s larger than any corn
crop ever produced. To meet demand, there needs to be a minimum
of 6 million additional corn acres planted next year or new
hybrids that will average 170 bushels per acre. The current
record yield is 160 bushels set in 2004.
“The question is, where will the acres come from?” Riggins said.
Currently 36 million erodible acres are idled through the
federal Conservation Reserve Program. Contracts on 16 million
will be eligible to expire sometime in 2007 but most will be
after July and too late to be planted in 2007, he said. Some
projections are that 12 million acres eventually will be brought
back into production, with 9 million going back into row crops
such as corn and soybeans.
“The land base is there,” Riggins said. “We haven’t solved the
farm income problem for the long term. We have the capacity to
produce back to low prices. This is not a long-run solution, but
we are going to have a commodity price bubble of two, three,
maybe four years of unprecedented profit opportunities in
large-scale commercial grain agriculture before prices return
closer to the price of production. In the short run, it is a
great opportunity.”
In addition to producing itself back to low markets, there are
other things that could make the bubble burst, including much
lower energy prices and changes in government agricultural or
energy policies. Ethanol currently has a federal tax credit that
helps its profitability.
“Another fly in the ointment would be Brazil and its capacity to
raise a lot of sugar cane and ability to raise a lot more,”
Riggins said.
The break-even cost of producing ethanol from corn is about
$1.10 to $1.30 per gallon. Brazil can make it for 89 cents using
sugar cane.
“This is just a short run windfall,” he said. |
Contact: Steve Riggins, 859-257-7256 |
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