farmgate: Will Ethanol Require Too Much Farmland?
First it was coffee shop talk. Then it was the market. Lately it was the USDA’s Outlook Conference. At this point there is little doubt that commodity prices are going to remain strong for a while. While beans and wheat try to protect their turf from the corn market, the battle for acreage at the Chicago Board of Trade is about as hot as your neighbors bidding for that 80 acres being auctioned down the road. Do we have a shortage of cropland?
Acreage constraints are being increasingly felt as domestic and foreign markets are demanding a share of the US Cornbelt. With the market rising daily in fear there will be insufficient acreage, USDA economists last week forecast a large increase in planted acreage expected for 2008. In his weekly newsletter, University of Illinois Marketing Specialist Darrel Good notes that USDA’s projection is for 225 million acres of corn, beans, and wheat in 2008, which is 7.4 million more than 2007. He says USDA’s calculation calls for fewer cotton acres, more double-crop wheat and bean acres, and some from the Conservation Reserve that is not renewed. But he said that 5.6 million still leaves a shortfall of 1.8 million acres, unless cattle are sold and pasture is converted to cornfields.
As you review USDA’s acreage projections the 10th PowerPoint slide summarizes the USDA forecast. Economists expect corn acres to slip from 93.6 million in 2007 to 90 million this year. Soybean acres are projected to increase from 63.6 million to 71 million this year and wheat is projected to increase from 60.4 to 64 million acres.
Along with the acreage estimates, USDA forecasts the national average yield at 154.9 bu., which Good says would be a 3.8 bu. jump from 2007. He believes the demand and carryout will be such that more than 90 million acres will be need to reduce the risk of a supply shortage and higher prices.
That is also the concern of a group of Iowa State University economists who’ve calculated commodity prices and biofuel subsidies and find that high commodity prices will result from continued intense competition for planted acres. The research authored by Bruce Babcock and colleagues, indicates that the demand pressure for corn acres has spilled over to soybeans and hay markets.
In one of the Iowa State theories, the corn ethanol industry expands until 18 billion gallons per year are produced, but only from corn and not from biomass products. That theory also suggests the soy biodiesel industry never gets off the ground without substantial subsidies. Their research also finds an equilibrium corn price of $4.76, soybeans at $13.01, and hay or switchgrass at $164.62 per ton, with 61% of acres dedicated to corn, 19% to beans, and 20% to hay or switchgrass.
The researchers conclude that competition for land ensures that providing an incentive to just one crop will increase equilibrium prices of all. They also determine that neither biodiesel nor switchgrass ethanol is commercially viable in the long run, and for it to be viable, it must be subsidized at a $1.55 to $2.11 per gallon rate, compared to $0.22 to $0.78 per gallon for corn ethanol. They contend the result will be more pressure for corn-based ethanol because of the requirement for a lower subsidy and corn takes less land to produce than switchgrass.
Summary:
As the competition for land increases, commodity prices go higher. With the increasing demand for corn to make ethanol, more land will be needed. Yet the federal mandates for biofuels shift the ethanol burden from corn to biomass, those cellulosic sources will consume even more land and require higher subsidies which may not be the best plan for the future.
Posted by Stu Ellis on February 26, 2008 12:22 AM to farmgate