Increased corn acreage benefits ethanol

By Hope Deutscher | August 10, 2009
In the past few months, reports have shown that corn acreage has increased by 3 percent, forcing prices to fall, but boosting corn-based ethanol producer profitability. According to the USDA National Agricultural Statistics Service crop acreage report released June 30, 2009, corn acreage is estimated at 87 million acres, making it the second-largest planted acreage since 1946, behind 2007.

The July 10 World Agricultural Supply and Demand Estimate report projected the 2009-10 marketing year average farm price for corn to be $3.35 to $4.15 per bushel, down 55 cents on both ends of the range. On July 13, the CME Group reported that ethanol prices had dropped sharply, but corn prices had dropped even further, resulting in a July ethanol-corn crush margin that was showing improvement. On July 13, it was moderately below the record 7.5 month high of 34.7 cents per gallon.

"I think corn prices should be relatively stable because we've got a decent supply," said Richard Asplund, research director for Commodity Research Bureau. "On the other hand, oil prices have some potential to go up over the next year as the global economy starts to recover, which hopefully it will in the second half of this year. It appears that there is some room for oil and gasoline prices to go higher over the next six months and into next year, whereas corn prices should be relatively stable. So that's a good outlook for ethanol producers. That should help their margins even more."

Volatility in the commodity markets continues to dominate the scene, said Nathan Fields, director of biotechnology and economic analysis for the National Corn Growers Association. "I think what the markets are probably doing is that with the price of oil, price of ethanol, price of corn, there looks to be some weakness in demand categories and that's eroding away at the price of corn. There's a lot of uncertainty around some of the ethanol plants out there. If oil price goes up, you're probably going to see corn demand increase; if you see any indication from the U.S. EPA that they are going to release the 10 percent blend limit on ethanol, you may see corn prices be supported a little bit, but with corn prices going down, we keep getting indications that supply is going up. That's fundamentally not an odd occurrence to happen."
Fields said the market is cyclical high corn prices lead to farmers planting more acres, which leads to lower corn prices and reduced acreage.

"Corn producers are a bit concerned," Fields said. "They are still engaging in a lot of hedging practices to maintain the viability and profitability of their operation. Really, for them, the volatility that we have seen in the past few years has been a heck of a rollercoaster ride but they are happy to be in the area of non-$2 corn because we're still up operating at a price point area where we're not relying so heavily on that government safety net."

Fields expects ethanol plant profitability to begin to turn around and more facilities to produce more ethanol - if they can feed it into the market.

"The USDA reported the acreage bumping up. I think that's a pretty clear indication that corn is still one of the best value propositions out there and we're going to see strong demand, even through some of this price volatility," Fields said. "The report also shows that there is plenty of supply out there to address any concerns that those who oppose biofuels may have. There's plenty of corn to go around, plenty to meet all of our market needs, we're not sacrificing one market for the other; we're serving all markets and serving all markets very, very well."