As the grain market bids on corn and soybean acreage for 2008, values of commodity prices rise and fall. But the primary resource being targeted is farmland. Its quantity is finite and the marketplace is attempting to establish a value on it, via the price of grain. But the grain traders are only tools of the food, livestock, and ethanol industries, and it is those entities that are really becoming the land barons of the 21st Century. Which one will dominate the others?

That issue is investigated by a corps of agricultural economists, led by Jacinto Fabiosa, Co-Director of the Food and Agricultural Policy Research Institute at Iowa State University. The analysis explored US and global agriculture production, commodity prices, energy policies, and primarily land allocation, with the impact of Brazil, China, India, and the European Union.

Ethanol demanded a thorough focus and the economists found that Brazil and the US are the largest producers, Brazil is the only exporter, and China, India, and the EU are significant users and those five countries constitute the bulk of the world ethanol market. On the other hand, the lack of profitability in bio-diesel production essentially cancels its consideration in the study. For ethanol, its price impact induces land reallocation away from other crops which may have a softer price.

In the US the researchers found that an increase in ethanol demand will only impact US ethanol expansion, but the impact on feed grain supplies will be felt in other countries which depend on the US for imported grain. That change in coarse grain supplies in the US also impacts the price of wheat and soybeans, as land is shifted from them into corn production.

If Brazil expands its ethanol production and use that action will affect the world ethanol market as well as the land used for sugarcane production. The sugar production will have ripples felt in other sugar producing countries.

The 54¢ tariff applied by the US on imported ethanol insulates the US producers from the world market, and a removal of that tariff would increase the world price of ethanol and jolt the US ethanol market. Brazil would increase its ethanol production to benefit from the higher world price.

The researchers looked for any impact that a 3% increase in US ethanol demand would have. They found:
• The increase in U.S. ethanol use directly affects the corn and sorghum markets, with reduction of stocks, and expansion of land devoted to coarse grains.
• Corn falls as a feed for livestock and is replaced by sorghum, barley, oats, and wheat.
• Feed use of corn falls and seed use increases. Food use falls primarily for high fructose corn syrup.
• U.S. land area allocated to corn increases and could potentially increase by higher rates in the long run when inventories bottom out at their minimum required levels for markets to function.
• In U.S. oilseed markets, there is a sharp reduction in land devoted to soybean and, to a lesser extent, to sunflower. These reductions lead to higher oilseed prices which lead to biodiesel production to fall.
• In livestock and meat markets, the ethanol shock translates into higher feed grain prices, lower DDG prices, and a small increase in meal prices. The shock leads to a small reduction in aggregate meat production. U.S. beef production increases slightly and wholesale meat prices increase moderately. Retail prices increase by even less.
• World land area devoted to corn increases moderately in aggregate, but more substantially in Argentina. Growth in land devoted to corn in Brazil and India follows nearly with the aggregate corn supply. Higher world prices for other feed grains also occur.
• World soybean land allocation falls slightly, but it expands in Brazil, the most competitive soybean producer in the world.

The researchers also looked at a 3% increase in the world ethanol use, which is reflected in nations other than the US. They found:
• The impact on the world ethanol markets has a direct impact on the world ethanol price, as well as, on the local ethanol markets.
• The average impact on the world ethanol price is very high, but the U.S. ethanol price (Omaha price) is left nearly unaffected. This lack of impact is a result of the 54¢ import tariff. Brazilian ethanol exports rise despite the increase in its domestic demand.
• In feedstock markets, the largest price effects are registered for sugar given the importance of sugarcane and sugar by products as a feedstock in Brazil and India.
• The effect on world corn prices is a tenth of that on sugar price, because of the limited size of the grain-based ethanol production outside of the United States, namely in China and the EU.
• Similarly, the price of other feed grains increases slightly. The world ethanol demand increase has some impact on grain stocks and grain trade flows, but land area devoted to grains and grain production remain nearly unchanged in most countries.
• To summarize, the impact on sugarcane and sugar is the only significant change in feedstock markets. Brazil sugarcane area increases substantially
• Sugar production falls as it competes with ethanol for the sugarcane feedstock and sugar exports fall. Other competitive sugar exporters expand their land area devoted to sugar crops.

Summary:
Based on the significant impact that ethanol has had on domestic grain markets and land prices, it will have an even greater impact if demand suddenly increases by 3%. Higher corn prices will boost prices of other commodities and there will be significant land reallocation. However the US and world ethanol markets are separated by the 54¢ import tariff imposed by the US, so the US will be insulated from a 3% increase in ethanol demand in the rest of the world. That will be primarily changed by the expansion of sugar cane production in Brazil where the rest of the world’s ethanol will be produced. The increase in world demand will have little impact on US agriculture.