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Peak Corn: Biofuels and the Future of Food

As tensions escalate over ethanol’s impact on food prices, the U.S. Department of Agriculture has published sobering projections on how the biofuels boom will affect crop prices in the near-term future. Ironically, as grim as it might seem, the agency’s projections of oil prices seems to suggest its the best alternative we have.

Peak Corn

In a study conducted in 2007, the USDA projected that ethanol production will use nearly one third of all corn produced annually by 2016.

Domestic demand for corn rises as ethanol production consumes nearly a third of all corn supplies. Global economic growth also pushes up prices as U.S. corn exports increase after 2009.

Domestic wheat demand will grow slowly as consumers reduce carbohydrates in diets. Demand in developing countries for wheat rises sharply as income and population grow, raising global wheat consumption and trade.

Domestic soybean demands continues to increase slowly. Soybean exports also grow slowly after an initial dip that reflects increasing competition from South America.

Slow expansion in domestic food use of rice is projected over the next decade. U.S. rice exports show moderate increases.

Ethanol production will reduce U.S. corn stocks dramatically. Crop acreage trends will lower soybean stocks as high prices encourage more farmers to plant corn. Wheat stocks will rebound in coming years as higher prices result in additional acreage and production.

The Trifecta — Biofuels, Agriculture & Energy

Ethanol, which will expand rapidly through 2010 as more production capacity comes online, will dominate the U.S. biofuel expansion for the near-term future. Production levels will reach more than 12 billion gallons annually by 2012. Because dry mill facilities will fuel much of this growth, corn will remain the primary feedstock. By 2010, ethanol production will consume more than 30% of the corn crop, but account for less than 8% of total U.S. gasoline consumption.

Biodiesel production has also surged in recent years. Although higher soybean oil prices should limit its growth after 2010, biodiesel production will hit a peak at 700 million gallons in a few years. At this level, biodiesel will consume roughly 23% of all soybean oil supplies while accounting for less than 2% of diesel fuel used on U.S. highways.

Cellulosic-based renewable fuels will meet the minimum amounts mandated in the Energy Policy Act of 2005 of 250 million gallons in 2013 and subsequent years.

Corn/Fuel Conversion Rates

New dry mill plants are expected to yield 2.80 gallons of ethanol from a bushel of corn, raising the industry average to 2.76 gallons per bushel at the end of the projection period. It takes slightly more than a pound of refined soybean oil to produce a pound of biodiesel, close to a one-to-one physical conversion factor. This implies that about 7.35 pounds of soybean oil are used to produce 1 gallon of biodiesel.

Acreage Expands and Shifts to Corn

Strong demand for ethanol production results in higher corn prices and provides incentives to increase corn acreage. Much of this increase occurs by adjusting crop rotations between corn and soybeans, causing a decline in soybean plantings. Other sources of land for increased corn plantings include cropland used as pasture, reduced fallow, acreage returning to production from expiring CRP contracts, and shifts from other crops such as cotton.

Demand Effects

The ethanol boom will increase corn and feed grains prices. U.S. feed use of corn typically accounts for 50-60% of total U.S. corn use, which typically accounts for 60-70% of world corn exports. Market adjustments to higher prices result in a reduced share of corn used directly for domestic livestock feeding and a lower U.S. share of global corn trade.

Use of Coproducts of Ethanol Production

Beef and dairy cattle can partially substitute a byproduct of ethanol production — distilled grain — for current feed grains. A 56-pound bushel of corn generates about 17.5 pounds of dry distillers grains during the ethanol production process. Based on assumptions regarding the use of distillers grains in the livestock sector, each bushel of corn used to produce ethanol results in a reduction of about a fifth of a bushel of corn feed use.

Crop Prices and Farm Program Costs

The ethanol boom will increase corn prices for a sustained period of time, which will likely result in decreases in farm subsidy programs. In addition, biofuels tax credits will reduce government tax revenues from agriculture.

**Assumptions and data used to generate charts can be found here.