Indiana agriculture.

• Author: Alexander, Corinne

Indiana agriculture is going to enjoy the best financial times since the 1970s but will experience more uncertainty in 2008. The excitement of 2007--with the rapid growth of the biofuels sector, strong export demand, and record wheat prices due to very tight worldwide wheat supplies--is expected to continue in 2008. Going forward, the combination of growth in biofuels and strong export demand means high Indiana farm incomes and increasing farmland values.

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Let's start by discussing the developments in the biofuels sector. As of October 2007, there are six operating ethanol plants in Indiana at Clymers, Linden, Marion, Portland, Rensselaer, and South Bend; these plants utilize about 169 million bushels of corn. There are an additional five plants under construction that will start operating in 2008 at Alexandria, Bluffton, Cloverdale, Harrisville, and North Manchester (see Figure 1). Once these plants are on line, ethanol production in Indiana will utilize 300 million bushels of corn (equivalent to 30 percent of Indiana's 2007 corn production--up from just 4 percent of corn production in 2005). This new usage for corn is happening throughout the Corn Belt and is dramatically altering Indiana's agriculture.

Indiana also has a growing biodiesel industry. The largest facility is the new Louis Dreyfus, Inc. soybean crushing facility at Claypool, which will process 50 million bushels of soybeans per year, equal to 25 percent of Indiana's 2007 soybean production.

While the biofuels sector has grown dramatically in 2007 and will continue to grow in 2008, future growth will slow considerably due to a reduction in ethanol margins. Over the last year, the price of ethanol has fallen from around $2.50 per gallon in January to $1.58 per gallon as of October 15, 2007. At the same time, the price of corn (the primary cost of producing ethanol) has remained above $3.50 per bushel. These falling ethanol prices and sustained corn prices are causing the ethanol industry to experience a sharp reduction in profit margins.

The biggest change in the ethanol industry is the decoupling of the price of ethanol from the price of crude oil. Even as the price of ethanol has declined almost $1 per gallon, the price of crude oil has increased from around $60 per barrel to over $90 per barrel. There are two reasons for this price decoupling: (1) the ethanol industry now produces enough ethanol to satisfy the oxygenate demand, and (2) the industry is...