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Ethanol’s effect on agriculture larger than its role in the gasoline market
Ethanol’s share in the overall gasoline market is relatively small, but its importance to the corn market is comparatively large. In 2006, ethanol (by volume) represented about 3.5 percent of motor vehicle gasoline supplies in the United States. However, about 14 percent of corn use went to ethanol production in the 2005/06 crop year. While carryover stocks of corn represented about 17.5 percent of use at the end of 2005/06, expanded use of corn to produce ethanol in the 2006/07 crop year will leave the ending stocks-touse ratio at 7.5 percent (USDA, April 2007).
With continued strong ethanol expansion, USDA’s 2007 long-term projections indicate that more than 30 percent of the corn crop will be used to produce ethanol by 2009/10, remaining near that share in subsequent years.
Corn carryover stocks remain tight over the next 10 years, representing 4-6 percent of annual use. Still, even by 2017, ethanol production (by volume) represents less than 8 percent of annual gasoline use in the United States.

As the ethanol industry absorbs a larger share of the corn crop, higher prices for corn will intensify demand competition among domestic industries and foreign buyers of feed grains. USDA’s 2007 long-term projections show average corn prices reaching $3.75 a bushel in the 2009/10 marketing year and then declining to $3.30 by 2016/17 as the ethanol expansion slows. Corn prices at these levels are record high and are unprecedented on a sustained basis, exceeding the previous high average over any 5-year period by more than 50 cents a bushel.
Higher corn prices affect corn’s role as an animal feed. Livestock feeding is the largest use of U.S. corn, typically accounting for 50-60 percent of the total. With higher prices, corn used for animal feeding declines to 40-50 percent of total use over the next decade. A coproduct of dry-mill ethanol production, distillers grains can be used as a livestock feed, particularly for ruminant animals such as beef cattle and dairy cows. Monogastric animals,such as hogs and poultry, are more limited in their ability to use distillers grains in rations.

The increased use of corn for ethanol production and higher corn prices have important implications for global trade and international markets. The United States has typically accounted for 60-70 percent of world corn exports. With the ethanol expansion and higher prices, however, the U.S. share of global corn trade drops to 55-60 percent. Global adjustments to higher corn prices include reduced foreign demand and increased foreign production.

Higher corn prices and producer returns also encourage farmers to increase corn acreage. Much of this increase occurs by adjusting crop rotations between corn and soybeans. Other sources of land for increased corn plantings include cropland used as pasture, reduced fallow, acreage returning to production from expiring CRP contracts, and shifts from other crops such as cotton. USDA’s Prospective Plantings report, released on March 30, 2007, showed farmers’ planting intentions for corn exceeding 90 million acres this year, up over 12 million acres from 2006.

Indirect Effects on Other Crops
With higher corn prices, relative prices among crops initially favor corn production over production of other crops.
Soybeans compete most directly with corn and on the largest amount of land.
Thus, much of the expansion in corn plantings comes from soybeans, and soybean plantings and production decline. In the Corn Belt, where corn and soybeans are frequently used in rotations, planting corn one year and soybeans the next, some of the acreage shift can occur by changing rotational practices. For example, the rotation might be changed to planting corn 2 years successively, with soybeans planted every third year. NASS’s Prospective Plantings report indicated that much of the 2007 increase in corn acreage will come from reduced soybean plantings, which are down more than 8 million acres from 2006, a larger decline than shown in USDA’s long-term projections.
With reduced production, soybean prices rise. As with corn, this reduces exports and carryover stocks for soybeans.
Reduced production and higher prices for soybeans also bring higher prices for both soybean meal and soybean oil. Further contributing to higher soybean oil prices is its expanded use in the production of biodiesel, which results in a larger share of the value of soybeans deriving from soybean oil. Plantings for crops that compete with corn or soybeans for acreage in some regions of the country are also likely to decline. Planting intentions for 2007 indicated a 3-million-acre decline in upland cotton acreage, for example. Shifts for other crops, such as wheat and rice, would be smaller, so price impacts and demand adjustments would be smaller as well.
MGR Archive 19.5.2007
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