For once, the fertilizer and agriculture industries agree on something – corn acreage will be up in 2007, and by a significant amount. The only question is by how much. Some say that even a 10 percent increase from 2006’s 78.6 million acres to 86.5 million may not be enough to supply the hungry ethanol industry.
With fertilizer prices surging in late 2006, fertilizer sellers see an increase in demand for their products. The industry is poised to take its cut of the positive environment by way of both increased sales and higher prices. The latter is due to shorter supplies on the nitrogen side, particularly urea, which saw the greatest increase in prices in the fourth quarter. NOLA granular urea prices were up some 41 percent from the Green Markets dated Oct. 2, 2006 through the issue dated Jan. 1, 2007 (GM Jan. 1, 2007, Oct. 2, 2006). Other increases were less dramatic, with ammonia at 23 percent, UAN 20 percent, ammonium nitrate 16.3 percent, and DAP 7.8 percent. The Mid-Cornbelt coarse potash price was up 4.4 percent during the period.
While domestic urea production should be up, good demand in the international market has kept imports at bay for now. The U.S., now at or near parity on the urea front with the rest of the world, may start to attract more imports.
Farmers want to keep as much of their new-found corn profits as possible. Along with industrial-end users, they are hopeful that low natural gas prices will keep nitrogen prices in check. While such will assure domestic production, the question remains whether there will readily be sufficient supplies of nitrogen in the spring to meet a significant increase in acreage.
Sources predict that over 20 million more acres will have to be devoted to corn in the future to meet ethanol demand. While some may come from conservation reserves, a good bet is that a good bit will be stolen from other crops. With less of those crops being planted, like corn, their prices should go up as well.
While many are excited by the outlook for 2007, industry veteran Dr. John Douglas of Douglas & Associates, normally an industry optimist, told Green Markets he has limited excitement. High grain prices may be causing too much of a good thing, said Douglas. He cited the livestock industry, where there is no excitement. High feed grain prices have caused livestock prices to dive. Douglas fears if corn prices continue to go up they could throttle demand. “We are building too many ethanol plants,” said Douglas. He said the construction of a new plant is announced practically every day. If grain and soybean prices get too high, they could make ethanol and biofuel production uneconomic, says Douglas. Add to that concerns that oil prices could always go down, making ethanol less competitive. On Jan. 4, NYMEX February oil was at a 19-month front month low of $55.59 per barrel.
One plus, say sources, is that distilled grain byproducts from ethanol production could go to the livestock industry to help offset higher corn prices.
Douglas said the U.S. can sustain the increasing demand for corn for one year. However, he warned, we can only produce so much with the acreage we have, fearing that his high price/demand disruption scenario could come into play in two to three years.
Keith Stokes, Stokes Engineering, is less fearful than Douglas, hoping that a bountiful year for nitrogen producers in 2007 will help them be able to go forward with new offshore projects in Trinidad or domestic coal-gas plants. He says ethanol plants are smaller and more nimble than ammonia plants, and easier to take up and down should economics warrant. Idled plants, however, may offer little solace to those expecting to make a quick return on their investments.
The Energy Policy Act of 2005 requires ethanol use to go to 7.5 billion gallons in 2012, up from a mandated 4 million in 2006. The industry exceeded 2006 requirements by 1 billion gallons, at 5 billion. At the end of 2006, there were 110 ethanol biorefineries operating in 19 states, with a capacity to produce 5.3 billion gallons of ethanol, an increase of 1 billion gallons from the start of the year, according to the Renewable Fuels Association. There are some 63 ethanol biorefineries and eight expansion projects set to come online in the next 18 months that will add nearly 5.4 billion gallons of new capacity, says RFA. As a result, the U.S. should easily have the capacity – and then some – to meet its 2012 goals a few years early.
More insight into the coming crop season will be available at Green Markets’ second annual Agriculture and Fertilizer Outlook Audio Conference Feb. 7. For more details, see page 3.