Corn Supplies Tighten as Ethanol Production Surges

There is an old joke that says if you lay all the economists on earth
end to end they would never reach a conclusion. The joke didn’t take
into account ethanol.

There is an old joke that says if you lay all the economists on earth end to end they would never reach a conclusion. The joke didn’t take into account ethanol.

Economists and commodity market analysts are in agreement that ethanol production and consumption is going to rise and feed grain prices will go along for the ride. The most aggressive increases will be for corn, which is the main feedstock for ethanol in the United States and Ontario.

In the U.S., some analysts put the increase in the price of corn at 25 per cent this year alone and most attribute the rise to increased ethanol production in key corn producing states. In Canada, the rise hasn’t been as steep because of the increase in the value of the Canadian dollar.

The surge in the demand for ethanol has little to do with market forces. Even at its current inflated values gasoline from oil is still a less expensive fuel. But it has everything to do with government policy. In part, the policies are driven by the comparative cleanliness of ethanol compared with gasoline. One study puts the greenhouse gas emissions of ethanol at 12 per cent less than gasoline.

Ethanol is also seen as a way to replace at least some of the oil imported by the U.S. with a domestically produced fuel. Equally important seems to be the desire of governments to boost the fortunes of North America’s long struggling grain producers.

As a result both Canada and the United States are supporting the industry with tax breaks, and a variety of subsidies. Provinces and states also have their own packages and perhaps most importantly are requiring that gasoline contain a specified minimum amount of ethanol.

For example, Ontario announced this summer it will spend $32 million to assist the construction of three new ethanol plants. The government cash will support the construction of new plants in Aylmer, Hensall and Cornwall. The money is part of the $520-million Ontario Ethanol Growth Fund, which will also provide annual operating grants worth up to $60 million annually for the three new plants, as well as facilities in Chatham and Collingwood.

In 2007, the amount of ethanol in a gasoline blend will be required to be five per cent in Ontario. Nationwide, the ethanol industry is forecast to grow dramatically. A Saskatchewan study says the federal government intends to increase domestic production from 200 million litres to beyond 1 billion litres in the next 10 years.

In the United States, projections estimate that demand for ethanol will increase to over 15 billion litres by 2015 from about four billion litres today. U.S. ethanol production already increased by 126 per cent from 2001.

For poultry producers and other traditional feed grain users the increase in ethanol production means one thing – higher feed costs.
Daniel Basse, president of research firm AGResource in Chicago said recently: “Bio-diesel demand is just astronomical. The corn market has to go to $4 or higher.”

Basse said demand for corn ethanol in the U.S. will almost triple by 2012, while corn stocks globally are at their lowest levels since 1984. Demand for bio-fuels is rising not only in the U.S. but also globally, particularly in China, Canada, the European Union, Brazil, and Indonesia, Basse said.

“This is going to have a tremendous dislocation on grain demand,” Basse said. The world will need “record large global corn crops if we’re going to keep up with the demand,” while global wheat stocks will continue to decline, Basse said.

Iowa State University economist Bob Wisner observed that in Iowa, 25 ethanol plants are operating, four are under construction, and another 26 are planned. If all those new plants are built, ethanol distilleries would use the entire Iowa corn harvest. In South Dakota, ethanol distilleries are already claiming over half that state’s crop.

Meanwhile, the U.S. Department of Agriculture reports that world grain consumption will increase by 20 million tonnes this year. Of that, 14 million tonnes will be used to produce ethanol to fuel cars in the U.S.

An analysis released by researchers at the University of Minnesota concludes that soybean biodiesel has much less of an impact on the environment and a much higher net energy benefit than corn ethanol, but neither can do much to meet the United States’ energy demands.

The researchers tracked all the energy used for growing corn and soybeans, and converting the crops into biofuels. They also looked at fertilizer and pesticide requirements, and how many greenhouses gases, nitrogen, phosphorus and pesticide pollutants were released into the environment.

The research questions other studies that claim biofuels require more energy to produce than they provide. The study showed soybean biodiesel returns 93 per cent more energy than is required to produce it, while corn grain ethanol provides 25 per cent more energy. Soybean biodiesel also produces 41 per cent less greenhouse gas emissions than diesel fuel, while corn grain ethanol produces 12 per cent less than gasoline.

The study also indicates that neither fuel can meet the growing demand. Diverting all current U.S. corn and soybean production to biofuels would meet only 12 per cent of gasoline demand and six per cent of diesel demand, and would leave no crops for food.
In Canada, the ethanol industry hasn’t developed as quickly as in the U.S. but is moving to catch up. The federal and provincial governments have introduced a variety of programs and policies and there is a move to change the regulatory environment for grain.

There are proposals to licence new wheat varieties for the Prairie provinces that provide higher yields, but have lower protein content. Such wheats would be unsuited for milling wheat, the target market for most wheats traditionally grown on the Prairies, but would be suited to ethanol production.

Both Saskatchewan and Manitoba have also adopted aggressive policies to stimulate ethanol production.

One Canadian study estimates that if governments adopt policies requiring 10 per cent ethanol content in gasoline, the resulting increase in demand will result in grain prices high enough that the need for government assistance for grain producers could be eliminated.

However another study by Daryl Kraft and James Rude, of the University of Manitoba, suggests that the entire prairie region could become a net importer of feed grains as both Manitoba and Saskatchewan increase ethanol and livestock production.

Meanwhile Ontario is already a net importer of corn and those imports are likely to increase as more ethanol production comes on stream.

The Foreign Agricultural Service (FAS) of the USDA forecasts that Canadian feed grain production will be down this year and Canada will import one million tones more corn this year than last.

The FAS is also forecasting tighter overall grain supplies as worldwide consumption continues to rise and production falls. “Rising consumption is expected to outstrip production for the second straight year, which would push world grain ending stocks to the lowest levels in more than 25 years,” the FAS said in a recent forecast.

It said that global tightness in corn supplies is due to a drop in U.S. corn production and a rise in demand for ethanol.