fedgazette

Energy drives district farmers' planting decisions

Toby Madden - Regional Economist

Published July 1, 2006  |  July 2006 issue

Ethanol refineries are "springing up like popcorn," said a member of the Minneapolis Fed's Advisory Council on Agriculture. Most of the energy distillers in the Ninth District are owned by local farmers, and many of the farmer/owners are obligated to sell corn to those facilities. This may explain why district farmers expect to maintain corn production at last year's levels, while overall production in the United States is expected to decline by 5 percent to 10.55 billion bushels.

Chart: U.S. Ethanol Production, 1980-2005

According to the U.S. Department of Agriculture, corn demand from ethanol plants across the United States is expected to increase to 2.15 billion bushels in 2006, a 34 percent increase from 2005. A bushel of corn can produce about 2.8 gallons of ethanol and 17 pounds of feed that can be used by cattle on local ranches and feedlots.

The increased production of ethanol is due partly to government subsidies and mandates and to the increased price of petroleum, for which ethanol is a substitute. However, higher energy prices also push up the cost of fuel and fertilizer, which are major inputs in the production of corn. The increase in demand and nationwide decrease in supply are expected to push the price of corn up to $2.25 to $2.65 per bushel this year, compared with $1.95 to $2.05 for the 2005-06 season.

Corn is not the only crop affected by the energy boom. The biodiesel industry is also starting to affect district producers' decisions. Soybeans and other vegetable oils are used in the production of biodiesel at various plants in the district. Production of soybeans in the United States is expected to be flat, while output in Ninth District states is expected to increase 12 percent. According to the National Biodiesel Board, biodiesel production has increased from 500,000 gallons in 1999 to 75 million gallons in 2005, with more than 90 percent of the increase coming from four recently opened biodiesel plants. In addition, three new plants are under construction, including a plant in North Dakota with a capacity to produce 85 million gallons a year using canola oil.

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