Corn, Ethanol and Water

Beginning early June, heavily rainfall flooded parts of northern Iowa and southern Wisconsin at a time when the ground was still soaked from spring rains. Homes, cities and roads suffered extensive damage. Corn and soybean fields were also hit hard; their future now in serious doubt.

Already this season, farmers were behind with planting due to the wet conditions. With the additional rain and flooding in parts of Iowa, Wisconsin, Indiana and other states, corn is taking another hit. Crop conditions as reported in the USDA's weekly weather and crop bulletin released Tuesday declined, with only 57% rated as good or excellent - down from 60% the week before. The real question is what that number is going to be next week once flooding subsides and the crops can be inspected. If prices lately are any indication, the market is betting that the quality of corn from these areas will continue to decline.

Corn (C, CBOT)

Just how many corn acres are affected is anyone's guess - and nobody's guessing. Most analysts have refrained from flat out saying that the sky is falling, preferring to wait until field inspections can begin. Experts quoted in CBOT's "Commodity News for Tomorrow" newsletter dated June 18 have made back-of-the-envelope estimates of crop loss in the range of 10% to 30% for corn, and lower ranges for soybeans. The financial impact of these losses is expected to rise into the hundreds of millions of dollars.

Thus, corn futures, which weren't exactly just lollygagging about this year, continue to rise.

Even those farmers lucky enough to have avoided the worst of the flooding will likely see a rise in production costs. Excessive rainfall can cause nitrogen depletion, necessitating additional application of nitrogen just to keep yields intact. Perhaps now would be a good time to look into some nitrogen producers? Those guys have it tough too - nitrogen fertilizer production in the U.S. is already down 40 percent since the turn of the century, thanks to the high price of natural gas. Besides, the biggest bet there - CF Industries (CF) - is already up 200% in the last year. How much higher could it actually go?

Downstream Effects

Higher corn prices have ripple effects across the food (and energy) chain. Beef, hog and poultry producers are facing higher feed costs. So far there haven't been big jumps in cattle or hog futures, in part because some producers are just dumping meat onto the market before they normally would, just to avoid time at the feed lots. But as corn continues to go up, it may just be a matter of time.

Ethanol, on the other hand, is reacting much more quickly.

Ethanol (AC, CBOT)

VeraSun Energy Corp announced Monday that it will delay the opening of two new ethanol plants due to the high cost of corn. The two plants were going to add an additional 220 million gallons of capacity per year. Elsewhere in the industry, Citigroup analyst David Driscoll raised concerns in a report quoted by the Financial Times, that small-to-midsize ethanol plants across the country may close due to high corn prices. He estimates that could result in a decrease of 2 billion to 5 billion gallons of ethanol capacity in the coming months.

More immediately, the flood is having a direct effect on operational ethanol plants. On Friday, the Iowa Renewable Fuels Association prepared a report on the status of Iowa's ethanol and biofuel industry after the floods. Their conclusion? "IRFA estimates that over 300 million gallons (annualized) of ethanol production is currently off-line." Since Iowa produced roughly 2.1 billion gallons in 2007, that means about 14% of their capacity is sitting idle.

Finally, damage from the flood and dangerous water conditions have temporarily closed parts of the Mississippi River to commercial traffic. Barges transport grain down river, and coal and fertilizer up river. Without this Twainian highway, companies have to find alternate routes to transport their goods. Unfortunately, many railway and road bridges have been damaged or are closed for inspection. Time to look at Huck Finn's raft again.

Lower production, not surprisingly, is leading to higher costs: ethanol futures have jumped 50 cents a gallon on the CBOE in the past month, as producers react to higher input prices by cutting production.

It's easy in ags to relax once the weather clears up. But this time, it's gonna hurt all year long.

In Midwest Floods, a Threat to Crops, New York Times, June 17, 2008

Ethanol Industry Statistics, Renewable Fuels Association

How the floods will hurt the economy, CNNMoney.com June 17, 2008

Comments

[Tim Plaehn]

I listened to the VSE investor conference from Thursday. They are getting $3.45 per gallon for their ethanol! A majority of the gas in many parts of the country require 10% ethanol blend to be due to new formulation methods to reduce costs.

[captbob]

The only way Ethanol is going to justify these prices is if it's re-labeled Vodka!
Sugar is the answer. If we want to pretend Brazil is populated by fools just to enrich our farmers, that's not the way to "solve" an energy crisis!.

[cyberclark]

Driven by speculation the US is bouncing from one energy screw up to another. Plow it all under and plant lintel again!

[Investor612]

A reality check for captbob and the Brazil myth.

1. Brazilians, with all that sucar cane ethanol, drive less than 10% as many miles as Americans.
2. Brazil has a surplus of desperate labor willing to work 60 hours of back breaking and dangerous work a week for $50 a week to grow and harvest sugar cane.

To pretend that Brazil is an example of what's possible for The US utilizing sugar cane ethanol is total nonsense.

[fran]

INVESTOR 612-- just import the stuff absent the duty/tariff. i don't care how Brazil achieves their cost, so long as it's competitive.

[DeanPlassaras]

Ethanol is just a joke, a heavy subsidy paid by the US consumer to the farming lobby.

[devassocx]

Stay away from most anything your government pushes, as they are collectively idiots...these guys are the original gang that can't shoot straight.
Ethanol is a case in point.

[Georealist]

Thought this might actually be a serious discussion about corn..ethanol..water. Corn, as anyone not receiving a government subsidy knows already, is a horrible biofuel. It's one of the great soil depletion crops..and an incredible water guzzler and fertilizer hog.
Brazilian sugar provides that country with some unique possibilities..few of which are open to the US. Importing sugar based ethanol may present difficulties of its own..since ALL ethanol picks up water in almost anything it travels in..except trucks.
So..the answer?? Nuclear power as one of the bases for an electrified future needs to be implemented very soon. But we'll see our next Congress piss away virtually any common sense in order to develop limited capacity sources such as solar..wind..geotherma... suits their predjudices and allows them to feel self congratulatory while everyone else lives very different lives because of arrogance and political shortsightedness.

[lefty]

Hydrogen, Hydrogen, Hydrogen! The world is 70% covered with water.

[PAULWOT]

Did everyone forget that the quickest way to reduce foreign oil dependance is Natural Gas?
Firstly, there is plenty of it right here in the U.S. and may be used as a bridge to get us to the next energy step. (electric)
Secondly, it's MUCH cleaner.
Thirdly, IT'S CHEAPER!!!!!!!!!
Fourthly reducing our depenance will strengthen our economy, and the dollar.
Fifthly, Infrastructure, Infrastructure, Infrastructure. A car that runs on NG can be refueled in your garage at your house. It's still a little time consuming, but the benifits are huge!
The car they have overseas that runs on compressed air can also use NG. Bus lines in some of the larger cities run on liguid NG.

It is a great part time solution but it cannot be the only one.