Status report on the ethanol industry.

Editor's note: Ethanol continues to be of high interest within the ag community. Here is the latest in-depth report about it from the Doane economists.

Ethanol demand is heavily influenced by government policy. For the past several years, the oxygenate requirement in the Clean Air Act has been the driving force. Most people believe that Congress will pass a Renewable Fuels Standard (RFS) this year and this new law will cause the boom in demand for ethanol to continue for the next decade. Rising ethanol use will be important for corn use and prices, directly affecting farmers around the country.

Congress has been trying to pass RFS for more than a year. Last summer the Senate approved an RFS amendment to the energy bill, but the bill did not pass. The energy bills the House and Senate passed this year both have an RFS component. If Congress can pass a bill this year, the establishment of an RFS will almost certainly be part of the legislation.

Ethanol Production

Current ethanol production is estimated at about 2.6 billion gallons. The RFS provisions now being considered would increase the use of renewable fuels to 5 billion gallons either by 2012 (the Senate version) or by 2015 (the House version). RFS refers to all renewable fuels, so not all of the growth would be ethanol, and not all of the ethanol would be produced from corn. Still, passage of the RFS would significantly increase the amount of corn used for the production of ethanol.

Ethanol plants currently use about 950 million bushels of corn annually to produce ethanol. Due to lower construction costs, most of the new ethanol production capacity is in the form of dry mill plants. An efficient dry mill ethanol plant produces 2.7 gallons of ethanol, 18 pounds of distillers dried grains (DDGS), and 18 pounds of C[O.sub.2] from a bushel of corn. While ethanol is the primary product of this process, economic disposal of the byproducts, i.e. the DDGS and the C[O.sub.2], is critical to the profitability of the ethanol plant.

The ethanol industry is working hard to improve the feed value of the DDGS. The DDGS is about 26 percent to 28 percent protein and is a good source of energy. It makes a good feed in dairy and cattle feeding rations, but improved digestibility is needed for the product to work well for hogs and poultry. However, as additional DDGS is produced and consumed, it will have an adverse effect on total corn used for livestock feed.

Ethanol production capacity is expanding at a break-neck pace. While many states have decided to ban the use of MTBE, the phaseout is moving rather slowly. The result is a temporary overcapacity problem in the ethanol industry, accompanied by declining ethanol prices and poor profitability.

Under assumptions that there is a dramatic increase in biodiesel production and use, and that some of the additional ethanol produced comes from crops other than corn, we predict that corn used for ethanol will increase by about 800 million bushels in the next decade.

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Corn Supply And Demand

The long-term trend in corn yield increases about 1.75 bushels per acre per year. With a base near 80 million planted acres, the rise in yields results in about 125 million bushels more corn produced per year. Clearly, the implication is that the rise in yields will at least keep pace with the growth of corn used for ethanol.

The data indicate that using corn to produce ethanol has about an 80 percent impact on total domestic corn demand. That is, about 20 percent of the corn used to produce ethanol comes back as DDGS to displace corn used for feed. This suggests the net effect of the RFS is to boost total domestic corn use by an estimated 650 million bushels over the next decade.

With total domestic corn use increasing about half as much as the production effect of rising corn yields, it is clear exports will continue to be a critical factor for corn prices. Without significant growth in exports, corn carryover stocks will rise, keeping prices down near the loan rate. But rising domestic corn use could set the stage for better prices if China ultimately becomes a net importer of corn as expected.

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Rich Pottorff is VP/Chief Economist, Doane Agricultural Services Co.