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Monday, January 29, 2007

More on the future of corn

From Corn eDigest:
Ethanol profitability and expansion will likely also decline during this time period, predicts Swanson, due to corn prices that are at 10-year highs and low prices for oil and ethanol. "To know the ethanol price, you need to know the price of gas," he says. "Right now, wholesale nearby reformulated blend stock (RBOB) gasoline is selling at $1.20-1.30/gal. The blending credit for blending in ethanol is 51 cents/gal. So, the nearby wholesale ethanol price is selling at $1.71-1.81."

The net margin on $1.70/gal. ethanol is very small with $4/bu. corn, emphasizes Swanson. In fact, it's not sustainable for long. Therefore, U.S. farmers should be cautious before switching too many acres to corn in 2007, he says.

"The law of unintended consequences comes into play anytime we make a big change," he adds. "If we switch a lot of acres into corn, the price of soybeans will go up, and if soybean prices go up to $8-9/bu., Brazilian farmers will be planting a lot more soybeans, and Brazilians can add a lot more soybean acres than we can."
In other words, the cobweb model might apply to the corn market and the substitutes in corn production, e.g., soybean. I have heard the arguments for why the subsidy of $0.50 per gallon is necessary. It goes hand-in-hand with the $0.50 per gallon tariff we placed on imported ethanol. Yet none of the arguments make sense to me and, and us cattle owners are (in partial equilibrium) bearing some of the brunt.

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