University experts say ethanol boom likely to boost corn profits

~ There are more than 36 ethanol plants under construction or expansion.

URBANA, Ill. -- The simple supply-and-demand economic principle has farmer David Kurtz bubbling with enthusiasm about the future of his business.

Dozens of ethanol plants under construction across the Midwest and Great Plains will mean more demand for corn, and that likely will lead to higher prices and bigger profits.

"I happen to be more encouraged by what I see going on in agriculture now than anytime from the time I got involved in it in 1977," said Kurtz, who farms about 800 acres in Vermilion and Edgar counties, southeast of Urbana. "More demand for corn, it's very simple, it leads to higher prices."

More than three dozen ethanol plants are under construction or expansion, according to the Renewable Fuels Association. Add those to nearly 100 that are already producing and it's easy to recognize the need for much more of the gasoline additive's major raw material, says Darrel L. Good, a crop marketing specialist at the University of Illinois.

In fact, the portion of the U.S. corn crop consumed for ethanol production is projected to rise from 12 percent in 2004-05 to 23 percent in 2014-15, according to a U.S. Department of Agriculture report released earlier this year. American farmers grew about 11.1 billion bushels of corn last year.

"I think very quickly, maybe as soon as next year, we need another five million acres of corn (nationwide), 5 to 6 percent more corn," Good says. "And maybe we need to add to that a little more in '08."

That means farmers, who already are beginning to think about next year's crops, need to be choosing now whether to plant more acres to corn, he said. Many of those extra acres could come from more farmers breaking traditional crop rotation patterns and planting corn on the same ground corn is growing on this year.

"If they're going to do corn-on-corn it implies maybe some more fall tillage, more fertilizer needs, more cash needs, difference in seed requirements," Good said. "You can't wait until the last minute to make all those decisions."

Break-even price

Good and colleague Gary Schnitkey developed a formula for farmers to determine whether growing more corn might be more profitable than keeping a 50-50 corn-soybean rotation. They determine a break-even price for growing corn by considering the difference between the cost of growing corn and the cost of growing soybeans -- which they set at about $110 per acre -- soybean price relative to soybean yield and corn price relative to corn yield.

Using a $6 per bushel benchmark price for soybeans, Good and Schnitkey reason that the break-even price for corn would be about $2.40 per bushel. Prices above that favor growing more corn while prices below favor soybeans.

"I think for a lot of producers, particularly in high-productive corn areas, you're going to find that break-even price is at a pretty reasonable level and probably at or below what the market is offering for the '07, '08 and '09 crop," Good told farmers attending the university's Agronomy Day last week. "We believe that there is a lot of momentum here, a lot of attractiveness to growing more corn, but you've got to push the pencil on it here as you make the decision."

Remaining cautious

But farmers do have some time to be cautious, said Philip Shane, market development director for the Illinois Corn Growers Association. Recent abundant crops have left a surplus in storage and a decline in exports could help meet ethanol's demands, he said.

"The corn is there. It's just going to be shuffled and price is going to dictate that," Shane said.

Even so, short-term demand for more corn to feed ethanol plants is inevitable, and that has farmers like Kurtz smiling.

"The biggest bugaboo to agriculture for the last 30 years has been too much. Now we can have too little. That's exciting," he said. "All of sudden, the supply-demand balance is in our favor and it never has been."

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On the Net:

Good and Schnitkey's report: http://www.farmdoc.uiuc.edu/manage/newsletters/fefo06--14/fefo06--14.h tml

Illinois Corn Growers Association: http://www.ilcorn.org