The coming crop rotation war

With a big carryover going into planting season and fresh memories of corn mountains at local elevators last fall, the mere suggestion that we may someday need more corn acres - millions of them - may sound a bit daft. But hear me out before you start calling the loony bin.

Let's start with ethanol, the 800-pound gorilla in corn demand these days. Iowa alone already has 20 corn processing plants that produce ethanol and other products, plus three more plants just across state lines that draw corn out of Iowa. In total, these plants eat up an annual 920 million bushels of corn - nearly half the state's corn crop. But Iowa and regions just across state lines have at least 27 new or expanded plants under construction or in the planning stage, for an additional 960 million bushels.

Iowa appears to be the most aggressive, but the trend is also happening in other Corn Belt states, along with a number of plants under construction or in the planning stage outside the Midwest. They will all need corn from somewhere.

The planned new plants give Iowa a potential 1.88 billion bushels of ethanol processing capacity. Last year, the state produced around 2.16 billion bushels of corn. When you add up corn for feed, other uses, export, and the additional new ethanol plants, the state is looking at a 350 to 400-million bushel deficit by year 2008 or 2009, says Bob Wisner, Ag Economist at Iowa State University.

"If proposals currently being considered in Congress to mandate 15 billion gallons of ethanol and 2 billion gallons of biodiesel fuel by 2010 or 2012 materialize, there is likely to be quite a tug of war between corn and soybeans for acreage," he says.

Wild card: China
Now throw in the wild card: exports, particularly to China. If China decides it needs our corn instead of being our second or third largest competitor, the market explodes. We might need to supply many of China's customers as well as its own needs.

If this happens we would need to see a large shift in crop rotations, predicts Wisner. In 2005, Iowa had a 56% corn-44% soybean rotation; by 2010, with China in the market, that rotation may well need to shift to about 71% corn-29% soybeans.

In 1995-96, the booming Asian economy and strong U.S. livestock markets gave buyers the ability to just keep paying up for corn. The result: $5 corn. Today Asian economies are doing pretty well, but showing some signs of stress, and bird flu is an on-going concern. Will they keep buying no matter what?

The market has already started hedging this bet, as prices for December 2008 futures have been exceptionally strong this winter.

"A substantial number of counties across the Corn Belt will be -or already are - shifting from surplus corn supply to deficit supply areas that require a large amount of corn to be hauled in from some distance away," Wisner says.

Bottom line
U.S. energy officials are already worried we won't have enough ethanol this summer. Long-term is anyone's guess. Unless corn yields increase faster than trend, the ethanol expansion slows dramatically, or an economical break-through occurs in converting biomass to ethanol, we may well need 10 to 14 million more corn acres over the next 6 years.

That's figuring in no major droughts, continued export demand and lower yields from 'unretired' CRP acres and corn-after-corn acres.

We're finally seeing every farmers' dream: unrelenting corn demand. Let's hope the dream doesn't turn into a nightmare.
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