The ethanol industry's appetite for corn is going to surge in the coming months and producers will likely lower corn acreage for the 2008 crop, says Chris Hurt, Purdue Extension agricultural economist.
“The corn-based ethanol industry will have excess production capacity and therefore narrow margins, and at times negative margins, for periods during the next two years.
“Corn prices will be historically high for the recently harvested 2007 crop and for the 2008 crop, and perhaps the 2009 crop, too,” Hurt says.
As of Dec. 18, total ethanol production annually in the U.S. was 7.3 billion gallons. An additional 6 billion gallons of capacity from plants under construction are expected to come online in 2008.
“In the first half of 2008 we estimate the nation's annual capacity will surge from the current 7.3 billion gallons to 11.8 billions gallons,” Hurt says. “The amount of corn required annually to feed that capacity grows from about 2.5 billion bushels today to 4 billion bushels by July 2008.”
Hurt predicts the rate of new plant openings will slow in the latter half of 2008, where an additional 1.7 billion gallons of capacity will come online, which pushes the numbers up to 13.5 billion gallons. “This will require about 4.5 billion bushels of corn if these plants are to run at full capacity,” Hurt says.
It's likely the ethanol industry will have to cut usage below the 4.5 billion bushels (the level of full capacity) to a rate closer to 4-4.1 billion bushes.
“If so, this means the nation's ethanol plants might run at levels that are about 10-12% below full production,” he says. “This also implies that cash corn prices will need to be high enough to convince some ethanol producers to run at less than full capacity.
“Given the outlook for $2-plus-per-gallon ethanol prices and $160/ton distiller's grains into the fall of 2008, it implies we will be seeing cash corn prices in the $4.25-4.75 range,” Hurt says. “It will not be until 2009 when corn production may be able to meet the demand.”