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Prospects for U.S. agriculture continue to be strong with record income in 2011 and a strong balance sheet.
Running close to capacity
Weekly ethanol production in December 2011 was running close to capacity as ethanol producers increased production just prior to expiration of the VEETC and ODC. Ethanol production levels have dropped about 4 percent since January 1, but still remain at almost 14.2 billion gallons, on an annualized basis.
Margins for ethanol producers have fallen as well in recent weeks, reflecting the drop in ethanol prices.
The longer run issue for corn-based ethanol is how much ethanol can be absorbed in the domestic gasoline supply — the so-called blend wall. At the time the Energy Act of 2007 was passed, forecasts by the Energy Information Administration for gasoline consumption implied almost 150 billion gallons of blended gasoline by 2013.
With the recession and subsequent sluggish economic recovery, however, forecasts for transportation fuel demand have been revised downward. Current EIA forecasts of blended gasoline fuel consumption in 2013 suggest less than 134 billion gallons, 16 billion less than forecasts made in 2007.
The current penetration rate of ethanol at roughly 10 percent implies a blend wall of about 13.5 billion gallons. Ethanol produced in excess of 13.5 billion must be held as stocks or exported.
U.S. ethanol exports hit record levels in 2011. An estimated 909 million gallons of denatured ethanol was exported 2011, about 43 percent going to Brazil. With world sugar prices falling, exports to Brazil will likely fall this year. Because of the expected decline in ethanol exports, corn use for ethanol is expected to fall by 50 million bushels in 2012/13 to 4.95 billion bushels.
In the short-run, growth in corn use for ethanol will be driven principally by the mandated levels under the RFS and the blend wall.
Over the longer-term, further expansion will largely be determined by relative attractiveness of ethanol prices to gasoline prices and the ability to market ethanol blends of more than 10 percent.
Dry weather conditions persist in the Southern United States. Devastating drought conditions prevailed over much of the Southern Plains causing poor yields and high abandonment rates in 2011/12.
Unfortunately, dry conditions have persisted in the region and worsened in the Southeast. It is still premature to conclude much concerning yield prospects for 2012.crops and much can happen between now and planting time. Nonetheless, weather will be a key concern this year, particularly in Texas.
2012 plantings and crop price prospects
Expected returns for soybeans and corn are again historically high reflecting strong new-crop futures and cash forward prices.