Perspective

By Michael Kelsey

 

 

The Lincoln Journal Star article, appearing just after the June 30 USDA crop report, was titled “Crimp in corn price won’t last.” The USDA report revealed that farmers had planted a million acres more than the March survey had shown. The market immediately responded by sending corn down 30 cents at the Chicago Board of Trade. So why the title of the article?

The sixth paragraph answers the question. “The report may not do much to affect the bigger picture, which is dominated by robust demand for corn for ethanol and exports, extensive flooding in Iowa and Illinois, and possibilities for reduced meat production and higher retail meat prices.” I would give a hearty “amen” with the caveat that “possibilities” be removed from the sentence. Meat production is already in decline and retail protein prices are already increasing.

I must share with you that my confidence in USDA’s report is not very high. Granted, they tried to account for the flooding in the Corn Belt. Drive-by evaluations are not the best, but if you travel through Iowa and Illinois (which I did in late June and early July), it’s quite easy to see that corn production will be heavily affected (negatively in my opinion). The picture includes fields that are completely flooded out; fields that have been replanted and thus way behind trend-line production. The picture also includes fields that have corn at just about every height imaginable. Parts of fields were flooded out, other parts were under water briefly so the corn was only stunted, and some of the corn benefited from lots of moisture in a good slope area to allow runoff of excess water. What will those fields yield? Whatever the yield, it cannot be uniform and thus will draw down average acre yields, possibly dramatically. All of this and more leads me to agree with the title of the article that the price of corn will resume its climb in the near future.

The comment period regarding Texas Governor Rick Perry’s request that the EPA modify the Renewable Fuel Standard (RFS) closed in late June. Consistent with our policy, NC supported the request, which would lower the RFS from nine billion gallons this year to 4.5 billion gallons. Nine billion gallons of ethanol will require approximately three billion to 3.5 billion bushels of corn (assuming 2.7-3 gallons of ethanol per bushel of corn). If the RFS is allowed to fully mature, the 15 billion gallon requirement will take five plus billion bushels of corn annually. What the RFS in affect does is ensure a set demand for corn. Another way to look at it would be that a set amount of the corn supply will be utilized for ethanol. Additionally, RFS requires that ethanol plants be built. It must do so in order to reach the required output. In other words, there aren’t enough plants currently in production to meet the mature RFS.

Nebraska currently has 22 ethanol plants producing over 1.4 billion gallons of ethanol annually, requiring over 500 million bushels of corn. According to the Nebraska Ethanol Board Web site, there are 18 plants under consideration, which if constructed would require 456 million bushels of corn. It is doubtful that all of those plants will be built. A more reasonable estimate would be 6-10 plants that may require 200 million to 250 million bushels of corn.

Some might say that we can build more plants in Nebraska. Thirty plants utilizing 750 million bushels of corn might be the extent of our capacity, though. If that’s the case, then the additional plants to meet the RFS requirements will have to be constructed elsewhere. Those additional plants will require corn and produce ethanol competing with Nebraska’s ethanol plants. In essence, if Nebraska has built all the plants we can, then the RFS is simply promoting more ethanol plants in other states that will compete with our plants. Interesting twist isn’t it? Y Michael Kelsey is NC’s executive vice president.