From the December 01, 2006 issue of Futures Magazine • Subscribe!

The ethanol impact

The ethanol industry is facing many challenges. Concerns such as transportation, acreage, yield, competitive feed stocks, export demand and cash and futures prices all are weighing heavily.

There is an amount of uncertainty as to just how much corn is actually going to be used for the 2006-07 marketing year and what affect it may have on corn futures price. Although the USDA estimates corn usage of 2.15 billion bushels for the 2006-07 marketing year vs. year earlier levels of 1.6 billion bushels, this 34% increase is suspect and possibly could be low.

Ethanol facilities currently operating have demand for 1.629 billion bushels of corn to annually produce 4.4 billion gallons. Plants under construction have potential production of 2.1 billion gallons, which would require an additional 777 million bushels of corn, for total annual production of 6.5 billion gallons of ethanol. The total demand for plants operating, including those under construction or expansion, suggest demand for 2.407 billion bushels of U.S. grown corn.

The Energy Department has set a goal of 7.5 billion gallons of renewable fuel production by the year 2012, which is likely to be met sooner than that. This additional 1 billion gallons of ethanol being produced to help reach the 7.5 billion gallon Energy Department target is expected to require an additional 370 million bushels for the total needs of 2.78 billion bushels of U.S. corn.

As we prepared for the Aug. 11 USDA crop report, the question was what impact could a demand of 2.15 billion bushels placed squarely on the 2006-07 corn crop have on corn futures? Allendale has completed research that suggests July 2007 corn futures have the potential to run higher.

Extreme importance is likely to be placed on the potential success or failure of the 2006 corn production. However, existing ethanol plants and those constructed are expected to call for supplies to meet the Energy Departments target regardless of whether corn production does or does not meet USDA’s goal.

Joe Victor is vice president of marketing for Allendale. He is responsible for producing the vast array of research on agricultural markets created by Allendale.

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