DATE: Janurary 21, 2008
HARDIN COUNTY COOPERATIVE EXTENSION SERVICE
201 Peterson Drive
Elizabethtown, Kentucky 42701-9370
BY: Doug Shepherd
County Extension Agent for Agriculture and Natural Resources
Here’s some thoughts from Kenny Burdine, UK Extension Marketing Specialist, on the implications of the recent crop report that he compiled the end of last week.
The major changes were on the corn balance sheet. First, production was lowered by 94 million bushels as yields were adjusted slightly downward. This obviously resulted in a smaller supply. However, the big move was a 300 million bushel increase in projected feed and residual use. He thinks this is the result of previously underestimating corn feed usage this fall. There was a slight decrease in food and industrial use, but this wasn’t even enough to offset the decrease in production. The net result was a projected decrease in corn ending stocks of 359 million bushels. This brought ending stock-to-use estimates from 14.2% in December to 11.1% in January.
Changes to the soybean balance sheet were much smaller and resulted in a 10 million acre decrease in projected ending stocks. Stocks-to-use in soybeans is now projected at 5.9%. Wheat ending stocks were actually increased slightly but remain at their lowest levels in 60 years.
Simply put, the corn balance sheet is much tighter than expected and the price of 2008 acres has gone up across the board. Although prices have fallen a little since mid-week, we have seen new crop corn move from the upper end of the $4 range to the low-to-mid $5's and seen beans move from the upper $11's to the mid-upper $12's as of last Thursday’s close.
Kenny maintains that US grain producers will shift considerable acres back to beans in 2008. Just for conversational purposes, let’s assume we harvest 5 million fewer corn acres next year. It would take a 160.4 national yield to reach the same production level we saw in 2007. This would be virtually the same yield we saw in 2004, which was a record by more than 9 bushels an acre. Needless to say, this would require an incredibly good crop year.
Feed usage is likely to decline in 2008 / 2009, and exports may as well. But food, seed, and industrial use are going to continue their uptrend, “fueled” by another likely billion bushel increase in corn used for ethanol. So, while the corn balance sheet for 2007 / 2008 has gotten tighter, it is only likely to get more that way in 2008 / 2009.
A Global Look at Biofuels:
Biofuels, especially ethanol and soy diesel, have been in the news for the past several years in the U.S. as energy policy changed in Washington D.C., and as the cost of oil and consequently gasoline has risen. But interest in biofuels is not confined United States. Indeed it’s of strong interest worldwide, but especially in the European Union countries and in Brazil. Biofuel production globally has tripled in the past seven years, but it still accounts for less than 3% of global transportation fuel supply. Oil in the form of gasoline and diesel fuel still dominates. Approximately 90% of world biofuel production is concentrated in Brazil, U.S. and the European Union. Here’s some thoughts from Dr. Larry Jones, UK Extension Specialist on this topic.
Increased demand for ethanol and soy diesel has helped fuel higher world food and feed prices. The International Monetary Fund (an international organization) estimates that world food prices rose 10% in 2006 (food prices in the U.S. only rose 2.4%) because of increases in corn, wheat and soybean prices that were being driven, in part, by increased demand for biofuels. As a consequence countries have responded differently. The Chinese put a moratorium on expanded use of ethanol because of rising feed prices. The Mexican government capped tortilla prices in 2007 to contain food price inflation from higher corn prices. Obviously, U.S. livestock producers are dealing with higher feed costs.
Several factors are driving the increased demand for biofuels globally. First, higher oil prices have increased the attraction of biofuels as a partial substitute for imported oil. Previous periods of oil price increases were relatively brief, but clearly there has been a structural change in global oil supply and demand suggesting higher oil prices for the foreseeable future. However, these higher oil prices are causing energy companies in the U.S. to seek additional recoverable oil supplies from areas as varied as North Dakota to Texas. Deeper offshore drilling sites are also being investigated.
Governments also play a role in biofuel production. The U.S. provides a 51 cent per gallon refund for blenders of ethanol and $1 for biodiesel from vegetable oils and animal fat. Some states provide additional incentives. Europe offers 18.7 Euros per acre energy premium for production of biofuel feedstocks. Brazil does not directly subsidize production of ethanol, but they do encourage ethanol consumption by charging a lower sales tax on ethanol than on gasoline.
What about the future? It’s mostly a list of unknown questions including: How high will oil prices go? How fast can cellulosic ethanol become cost competitive? What about the environmental impact of producing more feedstocks (such as corn, wheat and soybeans) from marginal land? What about using land for fuel versus feed and the impact on livestock producers and food prices? What other liquid biofuels may come on line in the future such as coal gasification? What role will government policy play? What role will conservation efforts play? Ultimately, these questions will likely be answered by profitability and the development of new technologies. But it is clear that biofuels in some capacity will continue to be a part of the global response to higher oil prices over time.
Educational programs of the Kentucky Cooperative Extension Service serve all people regardless of race, color, sex, age, religion, national origin or disability.