Expansion in the US Biofuels Industry: Potential Impacts on the Corn & Soybean Supply-Demand Balance

Dr. Robert WisnerAgMRC Renewable Energy Newsletter
July 2008

  Robert Wisner                                                            
  Professor of Economics and Energy Economist
  Ag Marketing Resources Center
  Iowa State University

Information from trade sources indicate that ethanol plants currently under construction will increase the industry’s production capacity by nearly two-thirds.  Almost half of those plants have been under construction for at least a year, and many of them will be coming into operation in the next 12 to 24 months.

Supply Reductions

News from USDA’s June planted acreage report indicates that with the expanding ethanol production capacity, corn supplies will tighten substantially in the 2008-09 marketing year that begins on September 1, 2008.  Major uncertainties still remain in the corn supply including the U.S. average yield and the final number of acres harvested for grain.  Rain-delayed plantings and an unusually cool season through late June suggest this year’s U.S. corn yield may be modestly below the long-term upward trend.  If so, a sharp reduction in exports and domestic livestock feeding almost certainly will be required in the next 15 months to provide enough corn for current and soon-to-be-in-operation ethanol plants.  The USDA June 30 planted acreage report and estimated acreage to be harvested also point to very little easing of the current tight soybean supplies.  Continued tight soybean supplies for another 12 to 15 months would provide incentives for more ethanol plants to invest in technology to extract corn oil from the distillers grain.  They also set the stage for a crop acreage battle next spring.

USDA’s June 30 report indicated U.S. farmers have shifted about 6.7 million acres of last year’s corn plantings to soybeans.  With higher than normal abandonment, an 8.8% decline from last year’s corn acres harvested for grain is indicated.  Because of increased soybean double-cropping after wheat, plus shifts of other crops, pasture, and some Conservation Reserve Program acres into beans, reported U.S. soybean plantings are estimated to be 17% above last year.  U.S. acreage to be harvested for soybeans is estimated to be up 15% from 2007.  Last year, farmers shifted large amounts of cropland from soybeans, cotton, non-durum spring wheat, and minor crops into corn in response to historically high corn prices and the need for more corn to meet the expanding biofuels demand. U.S. 2007 planted corn acres increased by 19.5%.

If the final acreage count this fall is near the June estimate, demand prospects show a need for high enough corn prices to cause a substantial reduction in corn feeding and exports, and probably also a need to temper the rapid increase in corn processing for ethanol.

Demand Rationing

USDA’s June 1 Grain Stocks report also was released on June 30. Information from the report indicates record-high corn prices have begun to cause a slight rationing of domestic corn feed demand.  Preliminary data indicate corn feeding and residual use (includes statistical error & handling losses) was about the same as a year earlier during the March-May quarter, after a strong increase in the previous two quarters.  Numbers of almost all types of grain fed livestock and poultry are moderately above a year earlier, but some wheat feeding is being reported in the southeastern U.S.  Part of the adjustment in domestic corn feeding can come from moving cattle off pastures into feedlots at heavier than normal weights, as well as marketing grain-fed cattle and hogs at lighter weights.  It appears likely that significant reductions in the number of animals being grain fed also will be necessary to adjust to reduced availability of corn for non-ethanol uses.  Our most likely projections (with a U.S. average corn yield 2% or 3.6 bushels per acre below 2007) show a need to reduce the domestic corn feed and residual use next season by about 11%.  Additionally, the projections include a 20% drop in corn exports in the marketing year starting this September 1.

Corn processing for ethanol is projected to increase by 28% from the marketing year ending August 31, 2008.  That would put corn processing for ethanol at 3.8 billion bushels, about one-third of the potential 2008 U.S. corn crop.  At 3.8 billion bushels, ethanol production for the marketing year would be approximately 10.6 billion gallons.  That just matches the average of 10.6 billion gallons of ethanol that are required by government mandates for the 2008 and 2009 calendar years.  The 2008 mandate calls for 10 billion gallons of corn-based ethanol, with an increase to 11.4 billion gallons required in 2009 and 11.8 billion in 2010.

Biofuels Expansion vs. Potential Grain Supplies

To assess how the potential corn and soybean production would match up with the continuing expansion in the biofuels industry, we have created supply-demand balance sheets for corn and soybeans with projections out to 2009-10.  These tables compare potential supplies with potential utilization, assuming 2008 harvested acreage is the same as estimated in late June.  Related charts show underlying trends in biofuels production, and grain stocks remaining at the end of the marketing years.

Sensitivity Analysis

To provide sensitivity analysis with uncertain weather and crop yields, we use three alternative yields.  The “Low” columns for 2008-09 and 2009-10 are based on weather problems and moderately below-trend yields.  “Medium” columns reflect approximately normal weather the rest of this season and normal weather throughout the 2009-10 planting and growing seasons.  The “High” Column reflects favorable weather the rest of this season and modestly above trend yields for 2009-10.  The first several columns in the tables show the historical supply-demand balance and prices.

When evaluating U.S. yield potential, it should be noted that a considerable amount of lower-yielding land has recently been brought into production.  Some additional lower yielding acres will be brought into production next year.  Also, fertilizer supplies are tight and very expensive, and some acres may get less than the optimum amount of fertilizer or may have lost nitrogen from leaching this year.

Medium Yield
Because of the need to ration domestic feed use and exports, corn prices in the med. column are projected to remain at historically high levels, but to be moderately below those reflected by futures prices in early July.  Crude oil, gasoline, and ethanol prices will be very important influences on corn prices.  Some industry analysts indicate crude oil prices may increase by another 14 to 18 percent over the next several months.  If that happens, gasoline and ethanol prices would be expected to strengthen.  Based on recent relationships between the two fuels, the higher crude oil prices at times could increase ethanol prices by as much as $0.25 to $0.35 per gallon from early July levels.  Such increases would add as much as $0.70 to $1.00 per bu. to the value of corn processed into ethanol.

Low Yield
The low projection, with a moderately below trend corn yield, indicates corn supplies would almost certainly become very tight in either year.  Severe rationing of domestic feed demand and exports through higher prices almost certainly would be needed under these conditions – unless the federally mandated ethanol production mandates were reduced.  With higher corn prices, the cost of producing ethanol would increase but would be tempered slightly by higher prices for the co-product, distillers grain and solubles (DGS).  Government ethanol mandates also would allow ethanol plants to bid more aggressively for corn than other users.  The corn yield in our Low scenario is about 8.5% below a trend yield, so it represents a less extreme weather situation than the drought years of the 1980s or the 1993 extreme flood year.  U.S. corn yields in 1983, 1988, and 1993 were approximately 20%, 25%, and 18% respectively below the longer run trend yield.  In 2002, with late plantings, the yield was 7.3% below the long-term trend.

High Yield
The high projection represents modestly above normal U.S. yields for 2009, but not the extremely favorable growing conditions of 1994 and 2004 when yields were 12% and 11% above trend. Under these projected conditions, corn and soybean prices would be somewhat lower than in the normal-yield scenario but still at historically high levels.  The modestly lower prices would be expected to increase investment in new ethanol plants and also to encourage existing plants to operate at a higher percentage of capacity.  Grain traders would anticipate the need for continued high grain prices as corn, soybeans, wheat, cotton, hay, pasture, and other crops compete again in 2009 and 2010 for limited U.S. cropland.  Also, soybean prices would need to be high enough to encourage expanded South American soybean production.  In recent years, Brazilian farmers have faced a continual increase in the value of the Brazilian currency (the Real) relative to the dollar.  When Brazilians sell soybeans for dollars in world markets and convert the price to domestic currency to pay for expenses, a higher dollar price is needed than in the past to encourage land clearing and conversion of pasture to cropland.  While currency issues have not been a major concern for Argentine farmers, the current Argentine 45% tax on soybean exports is a disincentive to expand production there.


The December 2007 energy legislation includes a mandate for 0.5 billion gallons of biodiesel production in 2009.  Some of that production likely will come from cheaper non-soy fats and oils because of high soybean oil prices.  But U.S. and world demand for oils for biodiesel as well as rapidly expanding soybean oil demand in China are expected to keep soybean oil prices well above the historical average.  Projected soybean supplies, utilization, stocks, and prices can be seen in the soybean balance sheet.

Other Price Influences

U.S. corn exports have been extremely strong in the current marketing year.  A big part of the strength is related to weather-reduced wheat production in a number of important wheat producing countries, and extremely high wheat prices.  USDA data indicate that 3.9 to 4.1 billion bushels of wheat have been fed to livestock globally in recent years.  With high prices, some of this demand appears to have temporarily shifted to U.S. corn.  In addition, China’s corn exports this season are expected to be about 190 million bushels less than last season.  With growing feed demand and several grain-based ethanol plants in China, this corn exporter may be very close to shifting from one of the world’s top three corn exporters to a net corn importer.  Foreign weather also will be an important corn price influence and thus will affect biofuels economics as well as domestic livestock industries.  Current conditions appear to favor modest easing of this season’s very tight world wheat supplies.  If so, U.S. corn may lose some of the 350 million bushels of export demand it has gained this season.


A key question facing the livestock industry is how quickly grain feeding can be reduced in the face of negative returns and tight grain supplies.  Highly respected livestock analysts recently projected record large losses for both cattle and hog feeders this year.  With time lags, these negative returns are likely to reduce corn feed demand and increase food prices, but it is uncertain how quickly that will occur.


With the rapidly expanding ethanol industry, prospective tightness in corn supplies and a need for more corn acreage in the next few years will make corn and soybean markets extremely sensitive to weather.  Early July conditions indicate corn prices for the next 12 months will likely be high enough to reduce combined domestic corn feeding and U.S. corn exports by 12 to 14 percent or around 1.2 billion bushels or from a year earlier.  Tightness stems from an expected 28% increase in corn use for ethanol and weather problems.  Near-perfect conditions for the rest of this summer and fall and a U.S. yield 2 bushels per acre above the long-term trend would cut the needed livestock and export demand rationing in half.  That would lead to moderately lower prices than indicated by early July futures prices.