Corn farmers brace for lower fuel demand

  • Article by: MIKE HUGHLETT , Star Tribune
  • Updated: November 23, 2013 - 5:07 PM

Economists say other markets could mitigate the effect on prices.

Star Tribune
hide

Tom Haag, president of the Minnesota Corn Growers Association, checked the progress this past summer of his corn crop, which he expected to do well. The reduced government mandate for corn ethanol muddies the pricing picture, he said.

Talk about bad timing. Corn prices were at three-year lows when the Obama administration on Nov. 15 proposed cutting the corn-ethanol fuel mandate for the first time.

Some corn farmers are already nearing break-even points, and a drop in ethanol use could just make matters worse. The proposal “is creating a drag on the market right now, and it will continue to be a drag on the market,” said Greg Schwarz, a corn farmer near Le Sueur, in southern Minnesota.

Despite corn growers’ angst, agricultural economists say they don’t expect a big fallout on corn prices.

Even if less ethanol is blended into the nation’s fuel supply, market economics for the biofuel are still favorable. “We’re going to use a lot of corn for ethanol, and I don’t think that changes with this new rule,” said Darrel Good, an agricultural economist at the University of Illinois.

For example, lower corn prices are sparking increased U.S. corn exports, and they’re likely to spur livestock producers to expand, too, since corn-based feed has become less expensive. The reduced mandate “does not affect the demand for corn very much,” Good said.

Corn is Minnesota’s biggest crop, and the state is one of the nation’s top five corn producers, along with Iowa, Illinois, Nebraska and Indiana. Twenty-one corn ethanol plants dot the Minnesota landscape, even though two are closed. And corn is crucial — as a feed ingredient — to two large Minnesota livestock industries, hogs and turkeys.

The federal mandate for ethanol in gasoline has been a key driver of rising corn prices over the past six years. So has the growing global demand for meat — and thus corn-based animal feed — as a middle class evolves in such booming countries as China and India.

But demand is half the equation, as has been only too apparent to U.S. farmers this year. Supply — courtesy of a record U.S. corn harvest — is ample, after drought toasted last year’s crop. Corn prices have sunk from 2012’s heady $7-plus per bushel to about $4.25 in futures markets.

And some analysts are predicting the price will fall further. “At $4 corn, we are at break-even for a lot of people,” said Tom Haag, president of the state Corn Growers Association, who farms near Eden Valley, in central Minnesota. The reduction in government-mandated corn-ethanol use only makes the price picture murkier, said Haag and fellow farmer Schwarz.

“It’s creating uncertainty not only in the corn market, but in the ethanol world,” said Schwarz, who like Haag is a shareholder in an ethanol plant, both turning over part of their crops to biofuel production.

Agriculture economists agree with farmers that the government’s ethanol shift is a damper on corn markets. But other factors are at work to offset it.

Relatively low oil prices and corn prices bode well for ethanol production, regardless of the cut in the corn ethanol mandate.

“Right now, ethanol margins are really good and overall, ethanol production is as high as it’s been for quite some time,” said Mark Greenwood, senior vice president at Mankato-based AgStar Financial Services, an agricultural lender.

Lower corn prices also will likely increase corn consumption by livestock producers, which has a stabilizing effect on corn markets. Already, broiler chicken production is up 3 percent to 4 percent this year, Greenwood said. Chickens have lifecycles of about 40-some days, so the broiler business can quickly take advantage of lower feed costs.

The hog production cycle is measured in months, but the University of Illinois’ Good said he expects a similar scenario to play out in the pork market. “You will begin to see some expansion there.”

Another stabilizer for corn: Rising export demand because of relatively lower corn prices. “What will be most interesting to me is the behavior of foreign buyers,” said Douglas Tiffany, an agricultural business management educator at University of Minnesota Extension. “I expect there will be quite a bit of corn moving this fall.”

 

Mike Hughlett • 612-673-7003

  • related content

  • Ethanol makers may be looking for new markets

    Saturday November 23, 2013

    As the EPA proposes to cut the ethanol mandate, market conditions are favorable for making even more of the fuel. Exports may be an answer.

  • get related content delivered to your inbox

  • manage my email subscriptions

ADVERTISEMENT

Connect with twitterConnect with facebookConnect with Google+Connect with PinterestConnect with PinterestConnect with RssfeedConnect with email newsletters

ADVERTISEMENT

ADVERTISEMENT

ADVERTISEMENT

ADVERTISEMENT

ADVERTISEMENT

ADVERTISEMENT

 
Close
Star Tribune