In testimony before a Senate environment committee, USDA chief economist Keith Collins said that with ethanol prices at the plant of $2.25/gal., a dry mill plant could pay up to about $5/bu. of corn and still cover operating costs.
“The all-time record-high season-average corn price is $3.24/bu. and corn prices have exceeded $3/bu. in only three other years. In other words, with continued strong gasoline and ethanol prices over the next several years, “corn prices will not discourage ethanol expansion unless corn prices increase to well beyond previous record-high levels.” He added that corn prices could set new record highs over the next 5 to 6 years.
In 2000, about 6% of U.S. corn production was used for ethanol, about 14% in 2005, 20% in 2006, and for the first time, in the 2006-07 marketing year, corn used in ethanol is expected to equal the amount of corn exported. But ethanol production could rise well above current levels.
Collins said that ethanol production capacity could increase to 8.5 billion gallons by 2008-09 and more than 10 billion gallons by 2010 if many of the new plants planned are built. That compares with 1.6 billion gallons of ethanol in 2000, and 5 billion in 2006.
Today, more than 100 ethanol plants operate in 20 states, with 42 ethanol plants under construction and another seven are expanding, according to the Renewable Fuels Association. When that construction and expansion are completed, ethanol capacity in the United States will be 7.7 billion gallons per year.
Another implication is that “ethanol plants will likely be able to bid corn away from other users over a wide range of corn prices,” Collins said. He added that ethanol production is exceeding most analysts’ expectations, including USDA projections. USDA will release a new analysis this winter.
In further sobering news for egg producers, Collins told the senators that corn stocks are likely to be increasingly tight and corn prices high, “so the corn sector will be highly vulnerable to market disruptions—ethanol plants and other users will be operating in a much riskier environment than what we have today. Market disruptions are likely not only from supply disruptions due to natural causes, but also from market participants such as China, which as witnessed in energy markets, can be a big demand-side factor. A systemic natural disaster, such as drought, could cause dramatic corn price increases under this tight environment.”
Despite this outlook, markets do work, Collins said, and corn yields since 2004 have exceeded the long-term trend based on 1980-83 data. If these yield increases reflect a faster pace of improved seed varieties and adoption, trend corn yields could well exceed 155 bushels by 2010. Each 5 bushel increase in yield above the current trend would be the equivalent of adding around 2.5 million acres to corn plantings, enough to produce an additional 1 billion gallons of ethanol.
