USDA Report Highlights Ethanol-Corn Domino Effect

May 18: According to a new report from the U.S. Department of Agriculture, "A large expansion in ethanol production is underway in the United States. Cellulosic sources of feedstocks for ethanol production hold some promise for the future, but the primary feedstock in the United States currently is corn. Market adjustments to this increased demand extend well beyond the corn sector to supply and demand for other crops, such as soybeans and cotton, as well as to U.S. livestock industries. USDA’s long-term projections, augmented by farmers’ planting intentions for 2007, are used to illustrate anticipated changes in the agricultural sector."

The report, Ethanol Expansion in the United States: How Will the Agricultural Sector Adjust? (Report No. FDS-07D-01, May 2007), indicates that ethanol production in the United States totaled almost 5 billion gallons in 2006, about 1 billion gallons more than in 2005. While this was a significant increase, further expansion in the industry is continuing, with production expected to exceed 10 billion gallons by 2009. This large and rapid expansion of U.S. ethanol production affects virtually every aspect of the field crops sector, ranging from domestic demand and exports to prices and the allocation of acreage among crops. Many aspects of the livestock sector are affected too. As a consequence of these commodity market impacts, farm income, government payments, and food prices also change. Adjustments in the agricultural sector are already underway and will continue for many years as interest grows in renewable sources of energy to lessen dependence on foreign oil.

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. 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. Yet, even by 2017, ethanol production (by volume) is projected to represent less than 8 percent of annual gasoline use in the United States.

USDA says that its 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. 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.

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.

With higher crop prices, farmland prices rise to reflect the increased value of crop production. This accelerates gains in farmland prices, which also reflect demand for land for nonagricultural uses, such as housing and recreation. As the livestock sector adjusts to higher feed costs resulting from the expansion in corn-based ethanol production, overall production of meats is reduced over the next few years. As a result, consumer prices for red meats, poultry, and eggs are expected to exceed the general inflation rate in 2008-10. Consequently, overall retail food prices in USDA’s 2007 long-term projections rise faster than the general inflation rate for several years.

Access the complete 20-page report which contains links to additional reference information (click here). Access a narrated slideshow providing an overview of this report (click here). Access additional information related to bioenergy is available from the USDA Economic Research Service Bioenergy Briefing Room (click here). [*Energy]