By now, unless you've been locked in solitary confinement somewhere outside the U.S., everyone has seen the charts and graphs that show the sharp increase in corn use that's to take place for ethanol.
What many people haven't seen, however, is the graph provided here that indicates the fun is only starting.
I'm not concerned whether or not American farmers will be able to produce enough corn to fuel all of these ethanol demands as well as feed the livestock and processing industries. Technology combined with more acreage results in a lot of corn.
The issue isn't really one of quantity, it's one of logistics. Where will corn be when it's needed?
Until this year, for example, there were essentially no ethanol plants in Ohio, a state where corn has traditionally been shipped to the East and Southeast for the poultry and pork industry. By the end of next year it's estimated that 38% of Ohio's corn crop will go into its own ethanol plants. Where are the livestock industries in the East and Southeast going to get their corn?
Another interesting dilemma is the logistics problem from Nebraska and west. Once ethanol plants begin operating in California, roughly 57% of Nebraska's corn crop will go into its own ethanol plants. Where is the corn for California ethanol plants going to come from? They will probably need 11 additional 100-car-unit trains of corn per month. Are there enough rail cars to ship this much more corn? And let's not forget the amount of corn that also needs to go to other Western states and to the Pacific Northwest.
Frankly, I don't know the answers to those questions but I can take a wild guess that it is going to be difficult to get both the cars and the track to ship that much more corn. Will it come from Iowa? Sixty percent of its corn crop will go to its own ethanol plants. In South Dakota, nearly 70% of the crop will go into its own ethanol plants.
So what's the answer? For one thing, our estimates on the percent of corn used in individual states will likely turn out to be too high. The usage numbers will be right but production numbers will go up enough in 2008-2009 (hopefully) that Nebraska may use only 45% of its crop rather than 57%, for example. Again, I don't think our concern is going to be having enough corn — the concern is getting it transported to the right locations.
I'm sure there are a lot of smart people, particularly in the railroad industry, who are working on these problems as you read this. Problems perceived well in advance normally turn out to be no problem at all. This one, however, will take a lot of work.
The volatility in the corn market has been unbelievable and is going to continue that way. Price swings of over $1/bu./year will be commonplace.
What we've learned this year, however, is that increase in usage does not automatically translate to higher prices. In fact, basis levels in some areas of the Midwest are no better now than they were three years ago. Basis volatility will be even more volatile than futures price volatility.
Because of competition in central Illinois for corn, basis levels will be as extremely strong as they will be in Indiana and Ohio. The swings will be dramatic when ethanol plants really need the corn.
Fun times lie ahead.
Richard A. Brock is president of Brock Associates, a farm market advisory firm, and publisher of The Brock Report. For a trial subscription and information on Brock services, call 800-558-3431 or visit www.brockreport.com.