Economists: Ethanol's impact on agriculture a mixed blessing

October 19, 2005

Economists: Ethanol's impact on agriculture a mixed blessing

WEST LAFAYETTE, Ind. - Converting more corn into ethanol would be a high-octane boost to many, but not all, in the agriculture industry, predict two Purdue University agricultural economists.

Corn growers, beef producers and the dairy industry stand to gain from an ethanol boom, according to economists Chris Hurt and Otto Doering. On the flip side, hog and poultry producers, grain elevator operators and grain shippers might be negatively affected. Soybean and wheat growers could go either way.

Hurt and Doering outlined possible impacts to Indiana agriculture from a new federal renewable fuel standard.

"The standard calls for the production of 7.5 billion gallons of renewable fuel by 2012 - a near doubling of current annual production," Doering said. "Ethanol and biodiesel are expected to make up most of the 7.5 billion gallons. To meet that goal, ethanol plants would use 2.5 billion bushels of corn, an increase in current usage of 1 billion bushels."

To put those numbers in perspective, United States corn production is estimated at 10.9 billion bushels this year, according to the U.S. Department of Agriculture. Indiana corn growers are projected to produce 856 million bushels of that total.

"The renewable fuel standard is very important, because it maintains the federal subsidy on ethanol production, at least through 2012," Doering said. "That will certainly motivate people to be in the ethanol production business."

Some of the new ethanol production will occur in Indiana. Several ethanol plants are on the drawing board, including a plant in the Montgomery County town of Linden, capable of pumping out 100 million gallons a year. A plant that size will go through about 35 million bushels of corn a year - about 30 percent of the corn grown in Montgomery and seven surrounding counties in 2004, Hurt said.

"A plant able to produce 100 million gallons of ethanol a year probably is going to increase corn prices at least 10 to 12 cents per bushel within 10 to 15 miles of the plant," Hurt said. "That certainly is going to be felt 40 to 50 miles out, as well. It may only be 2, 3, 4 cents a bushel higher at that distance, but there will be some positive influence on prices."

Higher corn prices would encourage farmers to grow more corn, leading to fewer acres of soybeans and wheat, Hurt said. Depending on market conditions, prices for those grains could rise or fall.

"On the soybean side, we'll probably see a reduction in acreage," Hurt said. "That says the supply of beans would be smaller. Our crushing capacity in the state is fixed with the plants that we have, so if the demand stays the same for crushing beans but the supply drops, that would say that the price impact would be upward. On the other hand, we're going to see the distillers' dried grains from the ethanol plants compete very heavily for some of the soybean meal demand at the soybean-crushing plants. So my guess overall is we'll probably see some weakening of soybean prices."

Distillers dried grain (DDG) is a byproduct left over when ethanol is extracted from corn. DDGs primarily substitute for protein in rations for ruminant animals like cows and sheep. In hog and poultry rations, DDGs are primarily energy substitutes, making the byproduct less valuable.

"About a third of the corn processed as ethanol remains as DDGs," Hurt said. "This new alternative feed source could have a more positive impact for beef and dairy producers, while the economic impact to hog and poultry producers will be less, since the negative impact of higher corn prices is not likely to be offset by feeding DDGs. The growth of DDGs will likely have the largest impact on the animal feed industry of any event since the advent of soybean meal in the 1940s."

Ethanol's impact on the livestock industry could be far-reaching, the economists said.

"Where is corn going now, that in a year or two years will not be headed in that same direction?" Hurt said. "Some of that would have gone into the Southeast poultry and hog markets. The Eastern Corn Belt is the largest agricultural shipper of rail cars from one region of the country to the other. Thirty-five million bushels of corn represents about 10,000 rail cars of grain that would stay here in Indiana each year and not be shipped out.

"As an example, if one were feeding hogs with 35 million bushels of corn, they could produce more than 2 million head. When we have a large new demand like this, there are going to be some current users that will get crowded out. And we think that's primarily going to be the feed users."

Other possible impacts from higher ethanol production include:

• A need for fewer grain elevators. "In many areas of the state, grain elevators buy the surplus corn produced in that area and find a market for the corn," Hurt said. "If that corn is used internally in the local area for ethanol, then some of those grain elevators will probably go out of business." Hurt and Doering believe some grain elevators could remain viable by serving as corn storage facilities for nearby ethanol plants.

• Lower export volumes. "The amount of corn exported from ports at the Great Lakes and Ohio River will probably decrease as, again, we see more corn used internally," Hurt said.

• A move away from traditional crop rotations. Instead of the conventional 50/50 corn-soybean rotation, farmers could shift to a 60/40 corn-soybean rotation. Planting some fields to corn in successive years could have agronomic consequences, Hurt said.

Even if the renewable fuel standard is met, ethanol and other biofuels won't replace fossil fuel in the near term, Hurt said.

"As a nation, our gasoline appetite is about 140 billion gallons a year," he said. "So if we reach 7.5 billion gallons of renewable fuel, we'll only be approaching 5 percent of total gasoline use.

"Ethanol cannot supply all of our liquid energy needs, but it can contribute to the solution."

Writer: Steve Leer, (765) 494-8415, sleer@purdue.edu

Sources: Chris Hurt, (765) 494-4273, hurtc@purdue.edu

Otto Doering, (765) 494-4226, doering@purdue.edu

Ag Communications: (765) 494-2722;
Beth Forbes, forbes@purdue.edu
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