CHICAGO (Dow Jones)--The burgeoning biofuels market is soon to spark a demand shift affecting grains and soy, one analyst said Tuesday at the Dow Jones Indexes-AIG Mid-Year commodity outlook event at the Chicago Board of Trade. "This is going to have a tremendous dislocation on grain demand," said Dan Basse, President of AGResource Co.
Increased prices based will be based on the availability and amount of biofuels over the next 12-14 months, he predicted. In response to demand for biofuel crops, Basse expects corn to rally above $4 per bushel over the next 12-16 months. Soybeans are expected to reach $5.50-$6.00 per bushel in the same period.
Soyoil will increase around 35 cents to 45 cents per pound over the next 12-14 months, and wheat prices are expected to reach near $6.00 per bushel. Crops such as corn and wheat can be used to make ethanol, while soybeans - primarily soyoil - are used to make biodiesel.
"I fear we'll be ending up in somewhat of a food fight between the fuel industry and the food industry," Basse said. He noted about two to three ethanol plants begin operation in the U.S. each month.
That will soon increase to eight to nine plants per month in the fourth quarter and into next year, Basse said. An investment gold rush into ethanol industry was prompted by crude oil prices of up to $60-$70 per gallon last fall, he said.
"This agricultural revolution is not only in the U.S.," Basse said. "The biodeisel demand coming out of Europe is just astronomical." He noted several other examples, including China, which announced last week it would grant $200 billion to develop biofuel-capable infrastructure within 20 years, expecting 5% of its fuel to be bio-derived.
He also mentioned Canada, which announced a 5% biofuel program; Malaysia and Indonesia are using 20% of their palm oil for biodeisel; and the European Union and Brazil are also large producers of biodiesel.
"From here forward, we have to produce record-large global corn crops if we're going to keep up with demand," he said. The USDA estimates 91 million metric tons of corn are in world storage, the lowest stockpile since since 1984.
"The world needs to produce about 1.4-1.6 billion bushels (of corn) each and every year to keep up with the demand trends," he said. This corn demand will likely increase next year, he noted. An additional 4.5 million acres of corn will be necessary in 2007 to meet U.S. corn ethanol demand, Basse said, and over 10 million acres in 2008.
The 4.5 billion gallons of U.S. ethanol produced in 2006 is predicted to increase to 6 billion to 6.2 billion next year, causing a tremendous shift in seeded acres, Basse said. The only way to assure these acreage expectations are filled is through higher market prices to induce farmers to grow corn, Basse said.
"When we talk about the revolution of agriculture in biofuels, we just have to look at the relationship from energy to ag to understand the potential," Basse said.
Currently, the price of corn relative to crude oil is at an all-time low. Chicago Board of Trade December corn ended at $2.62 1/2 a bushel Tuesday, down 5 1/2 cents on the day, while August crude oil on the New York Mercantile Exchange ended at $73.54 a barrel, down $1.76.
