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Ethanol
On Friday the World Outlook Board (WOB) released their monthly World Agricultural Supply and Demand estimates (WASDE).
According to the report, “The 2007/08 U.S. coarse grains outlook is for sharply higher feed grain production primarily from expanding corn acreage and record output. Sorghum, barley, and oat production are also expected to rise. Despite record feed grain output, U.S. feed grain stocks will rise just 1 percent. The 2007/08 corn crop is projected at 12.5 billion bushels, up 18 percent from 2006/07. Planted area is based on producer intentions reported in Prospective Plantings. Harvested area is based on derived demand for silage and historical abandonment. The yield is projected at 150.3 bushels per acre reflecting the slower-than-average planting pace reported in Crop Progress. Despite a 1-billion-bushel decline in carryin stocks from 2006/07, total corn supplies are projected at a record 13.4 billion, up 7 percent from the current year.
“Total U.S. corn use in 2007/08 expands substantially despite lower feeding and exports as ethanol corn use is expected to rise 58 percent. For the first time, ethanol use is projected above exports at 3.4 billion bushels reflecting continued expansion in ethanol plant capacity and profitability for ethanol producers. Feed and residual use is projected at 5.7 billion bushels, down 3 percent from this year despite expected increases in hog and poultry feeding. Rising supplies of distillers grains and other non-grain feeds resulting from ethanol production are expected to reduce corn feeding. U.S. corn exports are projected at 1,975 million bushels, 10 percent lower as expanding corn demand for ethanol keeps U.S. prices strong, and record production in South America provides importers with alternatives to U.S. supplies. Despite record production, with sharply higher use and lower carryin, 2007/08 ending stocks are expected to remain relatively flat at 947 million bushels. The season-average price received by farmers is projected at $3.10 to $3.70 per bushel compared with $3.00 to $3.20 per bushel for the current year.”
The WOB also noted that, “Global 2007/08 coarse grain production is projected at a record 1.1 billion tons, up 8 percent from 2006/07. Rising corn production in the United States accounts for much of this increase; however, corn production is also expected at record levels again in 2007/08 in Argentina and Brazil.”
With respect to oilseeds, the WASDE report stated that, “U.S. oilseed production for 2007/08 is projected at 84.1 million tons, down 13 percent from 2006/07. Lower soybean production, mainly due to sharply lower planted area, accounts for most of the reduction…The U.S. season-average soybean price for 2007/08 is projected at $6.50 to $7.50 per bushel, compared with $6.30 per bushel in 2006/07.”
Regarding corn-based ethanol, the WOB projected on page 12, that corn used to make ethanol for fuel would be 3,400 million bushels in 2007/08, up from an estimated 2,150 million bushels in 2006/07 and 1,603 in 2005/06.
A Dow Jones article posted at the DTN Ethanol Center on Friday noted that, “On Friday the U.S. Department of Agriculture released new production, supply and demand data for the 2007-08 marketing year. Among other changes, the government lifted the ethanol production estimate for the coming marketing year to 3.4 billion bushels, sharply above 2006-07’s 2.150 billion figure.
“The ethanol production figure was a ‘shot across the bow for the bears,’ said James Barnett, grain and oilseed at Man Global Research. ‘The carryout number for corn is less than expected and that’s the relevant (data) for the market.’”
The Dow Jones article added that, “Given the size of the new-crop production and demand, John Welsh, senior vice president at Peregrine Financial said cash corn prices will likely remain above the $3 a bushel area.”
However, the Associated Press reported today that, “An anticipated 60 percent jump in corn-based ethanol production next year will not boost food prices enough to harm consumers, the Agriculture Department’s chief economist said Friday.
“The economist, Keith Collins, projected that 118 U.S. ethanol plants will produce 9.3 billion gallons of ethanol for the crop year ending in August 2008, up 58 percent from the 5.9 billion gallons expected for the current crop year.
“‘This is just amazing. That’s a huge increase,’ Collins said at a briefing for reporters.”
The AP story added, “Still, food prices – particularly poultry and beef – will be ‘slightly higher’ in coming years as a result of increased biofuels production, Collins said. The meat, chicken and dairy industries have all said they are worried about the impact the ethanol boom will have on the cost of animal feed.”
Also on Friday, USDA released a report entitled, “An Analysis of the Effects of an Expansion in Biofuel Demand on U.S. Agriculture,” by The Economic Research Service and The Office of the Chief Economist, (Download Word file here).
In part, the USDA report stated that, “This report was done at the request of Senator Saxby Chambliss. Additional specific issues addressed were developed in discussions with Congressional staff. The main purpose of the report is to assess the effects on agriculture of alternative levels of biofuels production from corn and soybean oil. In addition, the potential for expansion of cellulosic ethanol production is reviewed.”
The report also indicated that, “Two alternative scenarios of biofuel production are examined for crop years 2007-16 using an econometric model of the U.S. agricultural sector. Under Scenario 1, annual domestic ethanol production increases to 15 billion gallons by 2016, and annual domestic biodiesel production increases to 1 billion gallons. Under Scenario 2, annual domestic ethanol production increases to 20 billion gallons by 2016, and annual domestic biodiesel production increases to 1 billion gallons. The increase in ethanol production is assumed to use corn as the feedstock, and the increase in biodiesel production is assumed to use soybean oil. These scenarios compare with about 12 billion gallons of ethanol production and 700 million gallons of biodiesel production in 2016 in USDA’s long-term agricultural projections released in February 2007 (baseline). During 2007-16, domestic ethanol production increases by an average of 2 billion gallons year under Scenario 1 compared with the baseline and by almost 5 billion gallons per year under Scenario 2. Domestic biodiesel production increases by an average of about 200 million gallons per year above the baseline during 2007-16 in both scenarios.”
On page three, the report stated that, “Low yield effects. Generally tight stocks during the analysis period suggest that any production shortfalls, such as those caused by adverse weather, would heighten impacts under both scenarios until markets adjusted. A 10-percent reduction in corn yields was simulated to occur in 2012 to assess the corn price effects of a short crop. As a result of such a yield decline, corn prices rise in 2012 to $4.71 per bushel, $1.02 above the Scenario 1 level, and to $5.51 per bushel under Scenario 2, $1.46 above the Scenario 2 level.”
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With respect to specific policy impacts and renewable energy, Philip Brasher reported on Saturday at The Des Moines Register webpage that, “Faced with the tight federal budget, the chairman of the Senate Agriculture Committee is looking at trimming crop subsidies to fund development of next-generation biofuels.
“Sen. Tom Harkin, D-Ia., said Friday that promoting the production of ethanol from cellulosic feedstocks such as switchgrass should be considered a way of subsidizing commodity production.
“‘You’re supporting commodities,’ he said of switchgrass. ‘Maybe a different commodity, but it could be a heck of a commodity in the future.’
“Harkin says more than $1 billion will be needed in the 2007 farm bill to promote the development of cellulosic ethanol.”
The Des Moines Register item concluded by saying, “Harkin is targeting the fixed annual farm payments. Those payments, which total about $5.2 billion a year, go to grain, soybean and cotton farmers. Critics say the payments inflate land values and primarily benefit landowners.”
For more analysis on Direct Payments, see this “Analysis from Washington” piece by Dan Morgan.
Trade Implicatons?
Meanwhile, an update posted yesterday at the Energy Roundup Blog (The Wall Street Journal) reported that, “Could the next WTO trade dispute be about biofuels? Keep your eyes peeled: Despite the industry’s youth, there are already warning signs that top biofuel producers including the US, the E.U. and Brazil have pulled on their boxing gloves and are gearing up to duke it out.
“In a little-reported tussle, the EU is considering a WTO suit or retaliatory tariffs against the U.S. for allowing B99 biodiesel sourced from other countries to qualify for a hefty $1-per-gallon U.S. blending subsidy. The biodiesel is then shipped to the EU, undercutting prices. Some traders even employ a trick called ‘splash and dash,’ which takes biodiesel from the EU, ships it to the U.S. to pick up the subsidy, then ships it back, says The Independent . U.S. biodiesel producers, for their part, say they are all in favor of snuffing out the loophole.”
-Keith Good
