Continued strong growth in ethanol production should keep corn supplies tight for at least the next few years. With low carryover stocks, livestock producers and the ethanol industry are both vulnerable to the high prices that would result from a poor crop. It is too early to make predictions about what the 2007 crop will be, but insight into the likelihood of a short crop can be gained by looking at historical variations in production.

Biodiesel has recently experienced a major surge worldwide. A rapid expansion in production capacity is being observed not only in developed countries such as Germany, Italy, France, and the United States but also in developing countries such as Brazil, Argentina, Indonesia, and Malaysia. Interest in and expansion of the production of the renewable fuel has been fostered by mandates and fi nancial incentives offered by governments.

The outlook for corn and soybean farmers looks exceedingly bright because of continued strong growth in U.S. ethanol production. December corn futures contracts are trading above $3.80 through 2010. Soybean futures are trading above $7.50 through 2009. The reason for this price strength is that U.S. corn plantings are projected to exceed 93 million acres from 2008 and beyond because of strong demand.

Growing demand for corn due to the expansion of ethanol has increased concerns that environmentally sensitive lands in the Conservation Reserve Program (CRP) will return to crop production. Most of the land currently in the CRP was enrolled because of the potential for environmental damage if it were farmed. A return of this land to crop production would likely lead to lower environmental quality. Iowa has a large number of CRP acres, it produces more ethanol than any other state, and it produces the most corn. Thus, an examination of the impacts of higher crop prices on Iowa land moving out of the CRP and the resulting effects on soil erosion, nutrient losses, and carbon sequestration will give insight into what we might expect nationally in the years ahead if crop prices remain high.