What is in this article?:
- Demand in grain market is strong and high
- Ethanol important in supporting demand
- Ethanol prices have increased over several months
Changing structure of ethanol industry
If this trend continues, he says, it could completely change the structure of the ethanol industry. “Then we’d be talking about blending caps and how much ethanol we could move through the fuel supply,” says Welch. These kinds of structural changes could alter the industry, he says.
“Murphy Oil recently bid on a newly constructed plant in Hereford, TX, that had been sold back to its creditors. That 100-million-gallon plant was built for $200 million and never ran for a day. Murphy Oil has stepped in and offered to buy the plant for $25 million – 12.5¢ on the dollar. That’s changing the economics of running an ethanol plant. There’s a significant difference in cost structure going on,” he says.
The ethanol market, says Welch, is very important in continuing to support the demand characteristics currently being seen in the grain markets, says Welch.
Numbers from previous years show, he says, that grain use can go down during a recession. But in the current recession – which is the worst since the Great Depression – use has continued to climb, and biofuels have been a big factor.
“The underpinning support of demand from the biofuel market has supported grain use even in these global economic conditions that we’re hopefully emerging from at this time. In my mind, that is very positive for grain demand and grain use as we move out of this recession and into more robust economic conditions,” says Welch.
Grain consumption continues to grow for those grains that are used for feed and fuel, he says. “Is it human food – not so much,” he says. “Rice, over the last 10 years, is actually down by 1% on a per-capita basis. Wheat is up 2%, and of course there’s a small feed component there. The real growth has been in soybeans and corn. Soybeans are up 24% over the last 10 years and corn is up 20%.”
In Kansas – “the wheat state” – for the first time since USDA has been keeping records, planted corn and soybean acreage is higher than wheat acreage.
“The Corn Belt is shifting west and south. This is an indication that farmers are adapting to new hybrids and new technology, and they’re able to grow corn and soybeans in places where we didn’t give them much serious thought before. It’s now an economically viable option.”
The worldwide situation is similar, he says, with a long-term trend of less wheat and more corn and soybeans. The trend can be tracked all the way back to 1980, says Welch.