Ethanol use driving prices, need for corn

An energy consultant predicts that half the U.S. corn crop could go to ethanol within five to six years.
Wednesday, May 31, 2006 | 12:00 a.m. CDT; updated 2:11 p.m. CDT, Tuesday, July 22, 2008

ST. LOUIS — Shortage isn’t a word often associated with the U.S. corn industry, which produces millions of surplus bushels every year. But demand from the ethanol industry is helping push corn consumption above production this year, and that has some people wondering: Should we really use a crucial food source to make fuel for cars?

For corn farmers like Elmer Martin, the question is a no-brainer.

“We’re just scratching the surface of how much corn we could raise in this country, if it was profitable,” said Martin, who farms 400 acres of corn near the central Missouri town of Thompson.

Farmers like Martin say demand from a budding ethanol industry has created a situation they haven’t seen since at least 1995. Corn supplies appear tight. Prices spiked this spring and don’t show signs of dropping soon.

“This doesn’t happen often,” said Ken McCauley, a farmer and incoming president of the National Corn Growers Association. He was almost giddy in describing the outlook for a commodity that has seen its price slide steadily over the last decade.

For a corn farmer, “This really does it for you,” McCauley said with a big smile.

Not everyone is so thrilled. Energy consultant Hank Williams said a boom in new ethanol plants means that half the U.S. corn crop could go toward supplying fuel companies within five to six years.

While farmers might increase corn production, Wall Street investors could outpace them by building more ethanol infrastructure, said Williams, with Jim Jordan & Associates in Houston. That could put a pinch on food supplies while making ethanol prices vulnerable to drought or other agricultural wild cards.

Rick Tolman disagrees.

The chief executive officer of the corn growers association said higher corn prices will spur farmers to plant more corn. They can easily do that by switching acres of soybeans, sorghum or other crops to corn production, he said.

“This whole scenario is going to make more production and more (corn) acreage out there,” Tolman said.

Corn prices have made solid gains this year.

During the winter, when farmers like Martin were deciding which crops to plant, corn prices were hovering around $2 a bushel. On Tuesday, corn futures for July were trading over $2.55 a bushel on the Chicago Board of Trade.

Tolman said the price jump boils down to simple supply and demand. Corn farmers are expected to grow about 10.7 billion bushels of corn during the current season, while total consumption is expected to hit about 11.5 billion bushels, according to figures from The ProExporter Network research firm based in Olathe, Kan.

This doesn’t mean there will be a corn shortage. Farmers produced a surplus of 2.6 billion bushels last year that will cover the production shortfall. There has been a surplus every year since at least 1975, according to ProExporter. The firm predicts there will be surpluses annually through at least 2016.

In spite of the surpluses, ProExporter predicts corn prices will steadily increase over the next decade, but won’t go higher than a yearly average of $2.84 a bushel.

As a globally traded commodity, corn has a long history of boom and bust prices. Tolman said there’s a predictable pattern — prices are high one year and too much corn gets planted the next. Prices drop, and farmers find themselves back at square one.

But federal guidelines for fuel production will help keep corn prices stable, Tolman said. The 2005 Energy Policy Act requires the U.S. to use 7 billion gallons of renewable fuels by 2012, including ethanol and other fuels like biodiesel.

“Our demand is going to go up every year — we know it,” Tolman said.

For that reason, Tolman said the corn growers association will continue to support growth of ethanol use, which has delivered price increases for corn farmers for the first time since 1995, when a drought pushed prices as high as $5 a bushel.

That’s good news for farmers, but it isn’t exactly a bonanza.

Martin, for example, isn’t elated with recent price jumps that put corn at $2.50 a bushel. That’s how much it costs to simply buy, plant and fertilize the crop, he said. Rising oil prices have made gasoline more expensive, but have also made petroleum-based fertilizer more costly.

“It’s just a dollar too cheap. The corn needs to be three dollars and a half to make money,” he said.

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