Impacts of Increased Ethanol Production

Impacts of Increased Ethanol Production

Tripling of corn for ethanol and more reliance on yield enhancing seeds and chemicals

by Chuck Hassebrook, Center for Rural Affairs

USDA Chief Economist Keith Collins recently presented analysis projecting some dramatic impacts from future growth in ethanol production. Below are some highlights, summarized in our words.

- The share of the US corn crop committed to ethanol will have tripled, from 6 percent in 2000 to nearly 20 percent for the 2006 crop.
- Corn ethanol alone cannot greatly reduce US dependence on crude oil imports. In 2006, it will account for the equivalent of just 1.5 percent of US crude oil imports.
- Oil prices have a greater effect on the profitability of ethanol production than corn prices. Crude oil prices would need to fall by more than half from their current $70 per barrel for ethanol to no longer be competitive with gasoline. With continued relatively high oil prices, ethanol plants can make money at much higher corn prices. Higher corn prices will not likely halt the ethanol expansion.
- Corn prices could set new record highs over the next 5 to 6 years in response to growing ethanol production. Corn usage will likely shift from exports to domestic ethanol production. Brazil and Argentina will produce more corn to take up the reduction in US exports.
- Corn acreage will increase in response to growing ethanol production. Higher corn prices may bring some land back into production from expiring Conservation Reserve Program (CRP) contracts. Higher corn prices may also prompt Congress to reduce CRP enrollments in the next farm bill.
- Corn stocks will be tight and markets volatile. A drought or increased demand by a major player like China could cause dramatic corn price increases.
- Cellulosic ethanol production appears to be the best renewable alternative for reducing crude oil imports, but it will be some years into the future before the technology is developed and its impact is felt.
- Recent analyses by Citigroup of New York City mirror USDA projections. Citigroup projects ethanol profit margins of over 20 percent for the next 10 years and a tripling of production. Increased ethanol production is projected to use 31 percent of US corn supplies, raising corn prices to $2.90 a bushel or higher. Growing demand for corn will likely cause shifts from soybean acreage to corn and lead to big increases in use of yield enhancing seeds and chemicals.

Agree? Disagree? Post a comment here or contact John Crabtree, johnc@cfra.org

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