Is Ethanol Industry Growing Too fast?
By: Nikos
November 6, 2006
The price for corn has jumped nearly 55% since mid-September, when U.S. farmers began harvesting their third-largest corn crop ever. Grain prices usually slump to their lowest levels of the year during the harvest season, but corn prices in recent weeks has shot through the rarely breached $3/bushel mark and could surpass that. "The consequences of ethanol are the biggest thing going on in agriculture today," says Keith Collins, chief economist of the U.S. Agriculture Department. "We are talking about a higher new benchmark for corn."
The prospect for a new plateau in corn prices represents a shift in the balance of power in the farm sector. It also foretells headaches for global food producers, which have benefited for nearly a decade from an abundant and cheap supply of ingredients made from U.S. crops, such as corn.
The corn rally is hitting packaged food brands already coping with a sharp run-up in wheat and sugar costs this year and is a detriment to some livestock farmers. Some farmers worry that they might have to have to cut production if corn prices continue to climb. To produce milk, a dairy cow must eat roughly 10 lbs. of corn each day; in the ranching industry, it takes six pounds of corn to produce one pound of beef.
Economists like Michael Swanson at Wells Fargo & Co. fear that the ethanol industry is growing too quickly, and any shakeout could quickly deflate corn prices. Rising ethanol supplies and falling gasoline prices have combined to cut the spot price of a gallon of ethanol by 45% from its record high in the summer. A surge of Brazilian imports of sugarcane-derived ethanol has contributed to the price decline.
"We believe that we are in the beginning stages of major changes to agricultural markets caused by rapidly expanding production of biofuels," said Credit Suisse Group in a report issued Friday titled "Corn Conundrum." David Nelson, a Credit Suisse analyst, lowered his ratings on meat companies Tyson Foods Inc. and Smithfield Foods Inc. to "neutral" from "outperform." In the case of Tyson, Mr. Nelson calculates that every 10-cent rise in the price of corn shaves a nickel from potential earnings per share.
Such a high price for corn at harvest will likely spur farmers to convert pastures and idled land into new cornfields next spring, which could lift sales by tractor and genetically altered seed companies.
The rally in corn, which is helping to generate record trading volume in the agricultural pits at the Chicago Board of Trade, could have a silver lining for taxpayers; last year, the federal government sent roughly $8.9 billion in subsidy checks to corn farmers to compensate them for low prices. Rising market prices might reduce the government's subsidy obligations to the point that federal checks to corn farmers could fall to $2 billion annually by next year, according to government analysis.
The U.S. Agriculture Department is predicting that the ethanol industry will consume 2.15 billion bushels of this year's corn crop, which is now in the process of being harvested across the Midwest.
According to a monthly Agriculture Department forecast due to be updated on Thursday, the expected corn harvest of 10.9 billion bushels is about one billion bushels short of demand in the next 12 months. That will help draw down supplies to the tightest level since 1995, when a summer heat wave devastated Midwest crops.
Source: ethanol-information.com