The ethanol craze and strong corn exports rallied corn futures up to new 10-year highs in early 2007. Ethanol fever may have peaked on Jan. 16, the night President Bush pushed for 37 billion gallons of ethanol by 2017. That night December corn futures surged to $4.06 in active trade. The Ethanol Profit Index chart shows that profits and many ethanol stocks peaked in August of 2006. Now with higher corn prices and lower energy prices, profits have dropped dramatically.
In addition, some political problems loom on the landscape for ethanol. Some legislators and academics are criticizing the ethanol industry as they anticipate higher food prices. They blame higher corn prices as the start of the problem as more corn goes for fuel and less for feed and food.
In this article I want to explain the long-term and short-term impact of higher energy prices on corn prices and ethanol profitability. I think we can grow enough corn and soybeans to satisfy both markets — that's the market's job.
I see two major changes in U.S. corn production that will go a long way to solving the food, feed and fuel challenge:
The high price of corn futures all the way out through 2009 is giving U.S. corn farmers the incentive to grow more corn. My early forecast is for corn acres to increase by 8-10 million acres in 2007 with another 2-4 million acres in 2008 and 2009. I'm using a conservative projection of a 2% increase in corn yields each year.
In addition to the increased acreage and yield, promising new technology suggests we can get more gallons of alcohol from each bushel of corn within the next 3-5 years. Again, this is a multiplier effect and you can see the huge growth in corn production and ethanol that is likely to occur within the U.S. Now add in what's going on in Brazil as they process more sugarcane into ethanol.
When I look at the development of the global ethanol industry, and the increasing efficiency of corn and ethanol production, I see the ability to satisfy the food, feed and fuel markets. With the large increase in corn acreage in 2007, 2008 and 2009 with a 2% annual increase in yield, I'm more concerned with how low corn prices can go vs. having enough to go around.
Brazilian Ethanol: 20¢/gal. Cheaper
In addition to the large increase in corn ethanol production, look for Brazil to sell more and more ethanol into the U.S. The ethanol tariff of 54¢/gal. on imported (mainly Brazilian) ethanol is due to expire in 2009. Whether this is allowed to expire will be a major political battle.
Current economics favor increased Brazilian ethanol production and exports into the U.S. At $3.70/bu. cash corn, the wholesale cost of a gallon of corn ethanol, including transportation to the East Coast, is about $1.90/gal. Sugar ethanol (including the 54¢ tariff) can be delivered into the same market at $1.70/gal. The ability of Brazilian ethanol to be delivered by ship right into the major markets on both coasts is also a competitive advantage.
Brazilian ethanol exports into the U.S. are surging from 30 million gallons in 2005 to over 418 million gallons in the first 11 months of 2006. Not only do the economics favor more Brazilian ethanol coming into the U.S., but also it appears that the administration wants to work with Brazil in developing a biofuels partnership, according to Nicholas Burns, undersecretary of state for political affairs.
Alan Kluis is the president of Northland Commodities LLC, based in the Minneapolis Grain Exchange, Minneapolis, MN. You can contact him at [email protected] or call toll free 888-345-2855.