Who knew that the price of crude oil (and government biofuel support) could turn No. 2 yellow dent into a giant crop niche — and play havoc with the growing niche of identity-preserved (IP) grains? After all, with $4 corn, why grow higher maintenance IP corn, especially if an ethanol plant is nearby?
Short term, energy corn may offer more income per acre over some IP grains, especially if the IP grain buyers won't raise their premiums to entice your business. However, some IP grains, like low-linolenic soybeans, offered 30% higher premiums in 2007 (from approximately $0.40 to $0.60/bu.) compared to last year. Those buyers want to gain long-term acres to meet the growing demand of such food giants as Kellogg and KFC, which want to reduce trans fats in their products.
According to the Renewable Fuels Association, 114 ethanol refineries are online and 78 more are under construction. These plants will eventually crank out 12 billion gallons of ethanol and consume 4.5 billion bushels of corn annually. Ethanol production in 2006 was 4.86 billion gallons (a 24% increase over 2005).
But before you bank on an energy corn niche long term, consider these important questions:
How long will the government offer tax credits to ethanol refineries? Is this renewable fuel support genuine and long term or politically motivated for short term? Will consumers continue their strong support of biofuels?
Will crude prices remain in the $45 to $55/barrel range? What if OPEC increases output to cut world prices? Would it collapse the U.S. ethanol industry, or would the price of oil not drop much when you consider China and India's growing oil appetite?
Will $3.50 to $4.00 corn slow outside investor interest in ethanol, which will slow ethanol refinery expansion?
Ethanol cannot travel in existing pipelines, so it must go via unit trains, barge and tanker trucks, adding higher costs to East Coast and West Coast markets. Will consumers in these markets buy ethanol at these higher prices?
Where is the huge 2007 corn crop going to be stored? Ethanol plants won't process spoiled grain.
Will ethanol become a true IP grain niche, where processors begin to pay premiums for specific hybrids with improved starch content?
How quickly will biomass-produced ethanol replace corn ethanol? Some experts guess 10 to 15 years, others say sooner with greater investment, and most experts say the ethanol market will be a combination of corn and biomass. In March, the government announced $1.2 billion in grants to six ethanol companies that will construct biomass ethanol plants in Kansas, Florida, California, Iowa, Idaho and Georgia. These six plants will produce 1.3 billion gallons of ethanol by using 1.8 million tons of biomass.
How practical is the biomass ethanol market? Who's going to produce, let alone store, all those bales when an average-sized plant needs approximately 1,400 large square bales (or 930 round bales) per day (700 tons) minimum?
Between now and 2010, 4.6 million acres will exit the Conservation Reserve Program (1.4 million acres are in corn-producing states). Will those acres all go into energy production? Or should growers consider the rapidly growing organic market because they can bypass the usual three-year wait to start organic production?
Local and portable
Because the ethanol industry continues its high demand for corn, the energy market and price of corn will be the comparison model used as growers decide to get in or out of the IP crop business.
“Growers need to be open-minded and flexible in their business plans from year to year,” says Dennis Strayer, an IP grains consultant from Hudson, IA. “If they have the ability to grow and preserve any type of IP grain that is being bought locally, then they can choose which direction to go depending on who has the most profitable program that year.”
Strayer sees continued growth in food-grade grains, non-genetically modified grains and organic grains, because food companies and consumers around the globe seek perceived healthier products and will pay for them. And research-driven seed companies are committed to developing and delivering the genetics to meet these needs.
Overall, the IP corn business comprises about 8% of the U.S. corn acreage, which totaled about 4 million acres in 2005. For example, production of some white and yellow IP corn continues to grow 4 to 8% annually. Premiums range from $0.15/bu. for non-genetically modified corn to $8.00/bu. for organic blue corn. For IP soybeans, premiums run from $0.50/bu. for non-genetically modified soybeans to $18.00/bu. for organic soybeans.
“The one problem with IP grains is that it's hard to get growers the premiums they deserve, because the end users don't understand all the issues that a grower goes through to preserve the identity of the grain,” Strayer says. “If buyers truly want to increase IP grain acres to meet customer demands, then the premiums should be calculated on two levels. Growers should be paid a premium to equalize yield first, due to yield drag of many IP grains. Then the second premium should reward the grower for his added time and management skills necessary to maintain IP grain quality and purity.”
Strayer also is involved in the creation of a simpler ISO 9001 quality management system for agriculture. Initially named QualityPlus, it integrates quality, traceability, farm safety and security, and environmental impact.
“It has been approved by the USDA, and we hope it can be introduced in 2007,” he says. Interest in such a program is increasing, he adds, especially as more food-related problems occur.
Some IP grain grower groups, such as Asoyia in Iowa that grows low-linolenic soybeans and produces/markets the oil, already have become ISO ready. “But some of these growers who have undertaken this challenging process are wondering where the market is for their expertise,” Strayer says.
“I tell growers who go through the ISO quality program that they are better prepared for the future, and the structured decision-making process will help their business today,” he says. “And hopefully the marketplace value for this expertise will come.”
Strayer says now is not the time to plant more corn and simply hope the commodity market and ethanol plants reward your production. He says, “I encourage growers to seek out the numerous local IP grain program options, then look to participate further up the value chain to capture more value — instead of just growing product.”
Second in a series: Check out upcoming issues for more trends that could benefit your business.