The federal government definitely joined in the spirit of cooperation this holiday season with the passage of the 2007 energy act and progress on the farm bill. These moves, along with developments in the energy and agricultural sectors, have improved the prospects for corn and ethanol over the next few years.

Rapid expansion in U.S. cornbased ethanol production has created concern that large surpluses of distillers grains will occur. Expected production levels are indeed high. Using a relatively conservative set of assumptions, a recent CARD study projects that the U.S. ethanol industry will produce nearly 15 billion gallons of ethanol and 40 million metric tons of distillers grains (dry matter basis) per year by 2011. Under a much more aggressive set of assumptions, the CARD study projects that ethanol production could reach nearly 30 billion gallons annually by 2016, generating more than 88 million metric tons of distillers grains per year.

Although the expanded corn ethanol and cellulosic biofuels mandates contained in the new Energy Independence and Security Act (EISA) have generated the most headlines, the act’s new biodiesel mandates may have a larger impact on U.S. agriculture over the next few years. Biodiesel use is now mandated to grow from 500 million gallons in 2009 to one billion gallons in 2012. U.S. biodiesel production was expected to decline significantly over the next few years because of low operating margins caused by high feedstock costs. The increased production due to the mandate will put upward pressure on already high vegetable oil prices, which in turn will further increase the cost of producing U.S. biodiesel.

High prices are their own worst enemy. Increased profit margins entice entrepreneurial investment, which results in increased production. Lower market prices inevitably follow. The magic hand of Adam Smith ensures that winners’ gains and losers’ losses will be temporary, as entrepreneurs correct market imbalances.