Ethanol demand could diminish as factor in corn market

The end of a major ethanol subsidy in the United States will likely slow development of the biofuel industry.

However, that could be a good thing as corn demand from U.S. livestock and overseas markets rise.

Corn dominates the crop markets, and its price trend has a big impact on wheat, canola and barley.

Ethanol stocks in the U.S. are rising this winter, following the Dec. 31 end of the 45-cents-per-gallon tax credit available to blenders of ethanol.

The surplus is driving down the price of the fuel and a few ethanol plants are reducing production or closing as they become unprofitable. The surplus might fall once the summer driving season arrives.

However, the U.S. Department of Agriculture forecasts that 2012-13 will be the first year since the ethanol boom began in the early 2000s that corn use for ethanol will drop.

It sees 125.7 million tonnes of corn going into ethanol production in the coming crop year, down from 127 million in the current year.

The USDA released its annually updated long-term, base line projections last week.

It forecast corn demand for ethanol will be stagnant until 2015-16, when modest growth will resume.

In the last five years the amount of corn going into ethanol grew 56 percent to 127 million tonnes.

Essentially no growth is expected in the next five years.

That is worrisome for grain producers at first glance because it takes away what has been a solid growing support factor for prices.

The USDA forecasts a farm price of $5 per bushel for 2012-13 and $4.30 for 2013-14, down from $6.70 in 2011-12.

The department sees U.S. corn area rolling back to 90 million acres for several years following the 94 million expected in 2012-13.

While ethanol’s pace slackens, overall corn demand still climbs, with feed and residual use climbing from 117 million tonnes in 2011-12 to 140 million in 2015-16 as the U.S. cattle herd rebuilds.

Exports, which have fallen for several years, start to pick up again, rising from 41 million tonnes in 2011-12 to 56 million in 2015-16.

Those who believe it is only a matter of time before China becomes a major corn importer likely think that forecast is conservative.

Good weather and improved yields in the last couple of years have allowed China to meet its rising needs and surprise the market, but even some Chinese officials admit the country will have to start importing corn at some point.

The U.S. will be an obvious source, but China is working to ensure it has a diversified list of suppliers.

Even as a Chinese delegation signed agreements to buy U.S. soybeans last week, another high level delegation was in Argentina signing agreements to allow corn from that country into China. Argentina is the world’s second largest corn exporter.

China will also be interested in corn from the Black Sea region.

Ukraine doubled corn production this year to 22 million tonnes and exports grew by 180 percent to 14 million tonnes.

If its winter grains prove to be as badly damaged by drought and frost as many analysts believe, farmers there will reseed in spring with a strong potential further increase in corn acres.

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