The recent history of U.S. ethanol for fuel can be divided in two periods: the last decade of the 20th century and the first decade of the current century. During these two decades, ethanol production grew by 60 and 780 percent, respectively. Estimated production in 2011 was 13,900 million gallons of ethanol. According to the Renewable Fuels Association (RFA), U.S. farmers harvested in 2011 almost 12.4 billion bushels of corn. In the same publication, the demand for ethanol production was estimated at 40 percent of the crop or roughly five billion bushels.
During a recent news conference held by the RFA, however, it was suggested that this 40 percent does not take into account the distillers grains co-product, which goes back into the marketplace as animal feed, and that ethanol only utilizes 14.5 million acres of the total 88.2 million acres of corn planted, ending up with 16 percent net corn acres used up by ethanol.
During the last decade, corn prices have increased by nearly three-fold. Other factors that influenced corn prices were energy prices, exchange rates, and adverse weather.
Dairy cow rations
In the U.S., diets for dairy cows in confinement consist largely of forage and concentrates. Before the recent expansion of the corn-to-ethanol industry, diets were formulated to contain approximately 50:50 forage-to-concentrate ratio on a dry basis. Alfalfa and corn silage have been the forages of choice, mainly because of their adaptability to the U.S. climate and their potential to sustain higher milk production. More than half of the cows in the Midwest are fed these two forages at variable concentrations in the diet.
Corn has been by far the most popular grain (93 percent of the cows) because of its high energy density and yield. Corn grain, because of its high starch content, allows formulation of energy-dense rations required by high-producing cows.
Soybean meal and whole cottonseeds complete the list of most popular feeds and were fed to 90 and 38 percent of the cows in the Midwest, respectively.
Supply and demand
Modern economic theories state other factors beyond supply and demand affect price, such as government regulations, speculation, as well as modern techniques of marketing and advertising. Even acknowledging these, a quick look at ethanol production and corn prices shows the noticeable relationship of supply and demand that unarguably operates in free markets.
If there is such a tight relationship between supply and demand, why didn’t corn prices increase between 2002 and 2004? Why are the graphed lines between ethanol production and corn prices diverging between 2002 and 2004 in spite of ethanol production increasing by 60 percent? This is again explained by supply and demand. Corn harvested for grain during that period increased by five million acres and corn production in million bushels by almost 24 percent. (See figure 1 on the next page.) From 2005 to 2009, ethanol production started to grow exponentially and we also had an increase in corn from roughly 11 to 13 million bushels, or 18 percent, which was reflected in corn prices around $4 per bushel. From 13 million bushels in 2009, corn production dropped to 12.4 and 12.3 million bushels in 2009 and 2010, respectively.