Ethanol Euphoria
Jan 1, 2007 12:00 PM, From the editor, Karen McMahon
Nearly every year, some major issue rages through the Midwest crop industry. Two years ago, it was Asian soybean rust. Today, the prime topic is ethanol. As always, our big question is, Will this issue create major change for our readers? Unlike Asian soybean rust, ethanol looks like it will greatly affect the current agricultural climate. Based on information from universities and other sources, ethanol appears to affect just about everything from land and corn prices to community growth.
The most shocking news is how much extra corn is needed to fill the growing ethanol demand. Robert Wisner from Iowa State University has calculated that growers must plant another 6.5 to 7.5 million acres of corn and average a yield of 160 bu./acre just to meet the demand for this year. Corn processing for ethanol should be up 34% this year compared to last year, according to his research. Iowa alone has 63 ethanol plants that are either operating or planned. Another 11 ethanol plants are located just across the Iowa border. At this rate, in a couple of years Iowa will need to import corn, which has always seemed an impossibility.
The increased demand for corn should keep corn prices strong, which in turn increases land and rent prices. Murray Wise, CEO of Westchester Group, a farmland asset management company, says land prices already are starting to climb in areas where ethanol production is particularly strong. For example, one such area that includes northwest Iowa, southwest Minnesota, southeast South Dakota and northeast Nebraska traditionally experiences grain prices $0.23 to $0.30 below the Chicago Board of Trade (CBOT) prices. As a result, land values usually lag $600 to $1,000/acre compared to similar land elsewhere. However, this winter, corn prices in the “quadrant” are $0.10 to $0.12 less than CBOT prices. Wise says land prices in the area have jumped, too. Good land in northwest Iowa that used to sell for $3,800 to $4,200/acre is now selling for at least $5,000/acre. Cash rents are following with some landowners pushing for increases of $40 to $60/acre.
While the ethanol fever rages, farmers need to use caution. The only consistent advice the industry experts impart is that the next few years promise plenty of volatility. You must be careful not to get caught in cash flow binds. Moderate your euphoria over strong grain prices with experience that shows $4 corn has never lasted long.
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