Increasing Ethanol Demand and the Likely Price Implications for Corn

According to the March 31^st prospective plantings report released by USDA, farmers in the U.S. intend to plant 86 million acres of corn in 2008. When compared to last year, this year’s acreage is estimated to decrease by approximately 8%.

High input costs associated with corn and relative soybean prices are encouraging farmers to reduce corn acreage and favor soybeans. The present estimated 86 million acres are still considered to be at high levels when compared to historical crop acreages. Also at the same time, the demand for corn is increasing at a faster rate than supply, creating an upward pressure on prices.

With an estimated yield of 150 bushels/acre (the average yield for the last five years), and adding the previous crop carryover, 2008 corn crop will likely produce at least 13 billion bushels of corn.

Data Source: USDA

If we look at corn consumption, the largest component for domestic use is for feed purposes. Higher corn prices in general and problems in the hog industry profitability may lower the demand in this area to around 5.5 billion bushels.

The demand for corn for ethanol is increasing rapidly for the last six years as evident from the graph. Corn for ethanol use may increase anywhere between 15 to 20%, when compared to last year resulting in an estimated use of 3.7 billion bushels of corn for this year.

If we expect at least 2 billion bushels in exports, the total domestic use is around 12.5 billion bushels. So we will have very tight ending stocks of 0.5 billion bushels or approximately 4% of total use.

Assuming these numbers held up well during the growing season, what are the price implications for the average investor? The 2008 December corn futures may reach an estimated high of $6.60 before expiration of the contract.

Data Source: USDA

Data Source: USDA

As of this writing, December corn is trading at $6.06 which implies that the current price is relatively undervalued.

Also keep in mind the other important factors which have the potential to influence corn prices. Any indication of short crop due to bad weather will put further pressure on prices and any positive deviation in corn acreage along with a bumper crop put a downward pressure on prices.

The first crop report for 2008/09 released by USDA on May 9^th may reveal some important clues for the future direction of corn prices.

Disclosure: No position in corn

Comments

[Tim Plaehn]

Nice informative article. I would like to see a comment on yield/acre trends. The big factor this year will be weather. I know it always is, but the very tight stock situation makes it even more so.

[paultaut]

I have no idea what the ideal corn growth weather is.
I just saw a forecast for below temps,above rain for the Midwest for the next month......any impact?

[wheels14]

When you use corn to make ethanol, your left over residue is a high protein feed stock for cattle. Therefore, you should only count a percentage of the corn used for ethanol as an increase in corn demand since most of our corn is alread fed to cattle. I do not know what that percentage would be. Otherwise, very useful article.

[Gunslinger]

USDA came out with corn 20% planted so far. Ahead of estimates, although still way behind normal of course.

Today's move should be reversed tomorrow (corn to drop / beans to gain).

[maverick]

Acres planted isn't an accurate indicator when you don't know what seed was used. Each year, more of the GM seeds, with higher yields, are planted. You could plant less acres with better seed and end up with a bigger crop. Throw in the weather variable and it's not even worth speculating yet.

[Gunslinger]

Scratch that 20%. The report table was printed backwards. This year was actually 10%.

Corn to trade even higher...

[CTProgrammer]

Ethanol accounts for 29% of the corn usage?!? Wow. I'd like to know, as wheels14 mentions, what percentage of that gets put back into the system for feedstock and what percentage is drained out strictly for Ethanol.

[The WholePicture]

While there is no doubt that increasing demand for ethanol is contributing to higher corn prices, the article does not give enough credit to other contributors to higher prices. The amount of corn used for ethanol has increased by about 2 billion bushels over the last five years. However, approximately 1/3 of the calories in corn is left-over for feedstock, so the "adjusted" amount of corn being used for ethanol has increased by about 1.3 billion bushels in the last five years. During the same time, China has switched from a corn exporter to a corn importer -- with a net difference of about 0.5 billion bushels over the same period. Other countries, such as India, have similar situations. When increase non-US demand is combined, the sum is similar to the increase we have for ethanol. If you look at the projections over the next few years, the rate of increase for other countries is accelerating, while the growth rate for ethanol is starting to subside. Last year corn use for ethanol increased by about 1 billion bushels, but this year it is expected to increase by about half that at 0.5 billion bushels. And, of course, you cannot forget the impact of the falling dollar on international commodities. In summary, ethanol is not the "big cause" of increased prices, but one of the "big 3" contributors.

[cruiser9805]

That's the problem, emerging India and China have become the driving force behind the price of all commodities. It has nothing to do with US demand or other markets. This boon will go on for 5 to 10 years. China is in the midst of industrializing itself anmd the rest of us are going to pay the price.

[cruiser9805]

BTW as china buys more big Macs, price of beef will go up and feedstock also goes up. Wanna guess who profits? Maybe the ethanol producers? Talk about the tail wagging the dog.