Egg Industry - January 2008

Major Factor: Ethanol

One major reason behind such high price forecasts is increased corn demand for ethanol, and if anything, ethanol use may rise further. Congress, for example, is considering legislation that would significantly increase biofuel mandates.

“While a cap on corn-based ethanol may be included in that legislation, the cap would be well above current levels of production,” Good noted. “A cap of 15 million gallons, for example, would eventually require about 5. 5 billion bushels of corn, compared to projected use for the current year of 3. 2 billion bushels.”

Good added that legislation being considered presumes heavily on the development of cellulosic ethanol technology that is economically competitive with corn-based ethanol. But if that technology is slow in developing, corn-based ethanol demand will remain very strong as long as crude oil prices are high.

A December Iowa State University report says that in the past two or three months, numerous articles in business and financial publications have indicated that the ethanol boom is about over.

“But just when many business writers were pronouncing an end to the rapid ethanol expansion, crude oil prices moved up by

➤While a cap on corn-based ethanol may
be included in legislation Congress is
considering, the cap Would be well
above current levels of production.

$30-35/barrel. High crude oil prices have been the primary driving force behind the ethanol expansion. The increased crude oil prices since late October have significantly improved ethanol-processing margins after a period of depressed returns in September and October. For some plants during the fall,” the report continues, “returns were negative.”

Slowed but not Halted Expansion

Last month’s report says that “declining ethanol profit margins have slowed but not halted the expansion of the ethanol industry.” Gross margins, the report says, “were considerably lower than at present from late 2001 to early 2003.” Current margins are well below the 2006 level, however, when halting of MTBE production created an immediate large premium market for ethanol to improve air quality in certain densely populated areas.

The report notes than due to ethanol, total U.S. corn acreage increased by 20 percent in 2007 to the largest acreage since 1944, when soybeans were a minor crop. Sources of the increased corn acreage were a 29 percent decrease in cotton plantings, a 16 percent decline in soybean acreage, and an 8 percent decline in non-durum spring wheat, along with declines in plantings of several minor crops.

However, the report continues, “action in the soybean market indicates this shift of acreage to corn is not sustainable for the longer term unless soybean prices are much higher than in

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