Ethanol Gold Rush In 2007 Has the Potential for Huge Acreage Shifts

The USDA released its September crop production report last Tuesday.  It projected US soybean yields to be 41.8 bushels/acre with the total crop projected to be 3.09 billion bushels.  Corn production was increased from the August USDA report to 11.114 billion bushels; expected yield was pushed to 154.7 bushels/acre.

It was a bit of a shock for the market even though most analysts said the report was bearish to neutral.  When the August 11th report came out with big crops, everybody knew August weather would be key.  In my part of Ontario, it was wonderful.  Ditto for much of the rest of the Corn Belt.  Now we’ve got more corn and beans.  The question is will this big crop get even bigger?

That answer will surely come on October 12th when the USDA one again releases their crop production numbers.  However, this time they will have some significant harvest results.  Soybean carryover could be really onerous.  Clearly we’ve got the second biggest corn crop in the field. We’ll see if it grows bigger once it gets in the bin.

Of course next year all of us are going to be rolling in the dough because of that ethanol gold rush.  Remember I talked to one Ontario corn trader who told him a floor trader in Chicago told him corn futures were going to $5 and $6.  The bottom line is we’re not even close to that now.  However, with all this ethanol capacity being built, you would think it would have to break someday.

So let’s assume for the moment that things do improve.  Let’s assume that they improve significantly and we once again see $4 corn in Ontario and $3.50 corn in Michigan in 2007.  Let’s also assume when that happens some of my agricultural economist cousins will again start saying, “Where are we going to get the land to grow the food/fuel the world wants.”  Yes, those are big assumptions.  However that’s exactly what some ethanol boosters are talking about.

So the bigger question might not be will we have the acres to produce those crops, but how will agriculture change if in fact that rosy scenario currently being played out in ethanol board rooms happens?  What happens to the acreage of soybeans, wheat, and other grains and oilseeds?  What happens to the number of cattle and hogs on feed?  Where will this livestock be grown?  What other production shifts will take place.  What will be the environmental impact of such shifts?

For instance in Ontario there is currently three ethanol plants up and running.  More are planned.  In 2004 there were 2.3 million acres of soybeans in Ontario, 1.6 million acres of corn, and 750,000 acres of wheat.  There were 90,000 acres of oats, 235,000 acres of barley and 55,000 acres of canola.  And there was a weakened cattle sector because of BSE and a solid hog sector.  What happens when these ethanol plants get built?

Does the corn number double taking acres away from soybeans and wheat?  Or does the corn acres come from the minor crops as producers move toward more corn?  Do livestock numbers go down because of all that “expensive corn”?  Or does the North American livestock market “rationalize” more and more until ultimately the least cost feed location starts to feed the most livestock?

The challenge for producers is to anticipate and plan to capture these opportunities.  At the present time I shouldn’t be a farmer, journalist, speaker or radio commentator.  I should be a “grain bin salesman.”  Sales are off the chart.  They are going up mostly for corn.  That’s in a market environment where right now they make most sense for soybeans.  However the hype is so hot, corn bins in some environs are going up everywhere.

So what happens next year in 2007/08 when we get a bin dropping 12.1 billion bushel crop in the US and corn tanks once again?  Cash prices in Ontario at $2.35.  Simply put that’s the chance you take anytime.  However, there seemingly are lots of agricultural economists getting paid a lot more than me that feel that’s unlikely.  Livestock producers will just have to adjust.  Everybody in the rest of the grain complex will have to get ready for that great shifting sound in farm country.

This is all happening in a greater market environment where the price of oil is tanking.  Crude oil was at $77 a barrel in early August.  Last Tuesday, October crude-oil futures settled at $63.76. Whoooooooooooooo!  Maybe oil will get cheap again?  That wasn’t part of this ethanol/gasoline/corn/agricultural prosperity equation.

The agricultural economic truth about these potential production shifts is probably square in the middle.  Yes, there probably will be a gold rush.  However, I don’t think it will be as lucrative as some believe.  Clues will come with grain futures prices in the next three months.  However if this thing is for real, futures prices next spring should resemble something more akin to “fireworks.”