July 2, 2007

 

Latest US corn crop report may ease financial worries on US agri-sector
 

 

Ethanol producers and food consumers might be in for some financial relief in light of new data showing that a bumper crop of corn is on the horizon.

 

The US Department of Agriculture reported Friday that farmers will sow nearly 93 million acres of corn this year - about 3 percent more than an earlier March forecast and 19 percent more than farmers planted last year.

 

That much corn hasn't been harvested since the end of World War II. The report was much higher than analysts and traders had expected, and Keith Collins, the chief economist at the USDA, said, "This is a report that's probably pretty good for everybody."

 

The huge crop could send corn prices lower over the next few months. Still, Greg Wagner, director of marketing risk management for Horizon Ag Strategies, cautioned that "we are not out of the weeds yet."

 

There is a looming risk that harsh weather could roll through the Midwest and cut into yields at harvest, or that a drought in China could send more US corn overseas, keeping prices buoyed. At midday Friday, the nearby corn contract was trading at US$3.49 a bushel on the Chicago Board of Trade. That's down sharply from earlier this month, when corn was trading above US$4, but still up from last year at this time.

 

A large corn crop stands to ease tensions in the so-called "food versus fuel" debate, in which some livestock producers, environmentalists and consumers globally fear that an increase in corn-ethanol production is siphoning corn from food users to feed the engines of cars. Some companies, including General Mills Inc. (GIS) and Tyson Foods Inc. (TSN), have cited higher corn costs as reasons for raising prices on their goods.

 

"American farmers have heard the market signal loud and clear and they have answered that call," said Bob Dinneen, president of the Renewable Fuels Association, a trade group for ethanol producers. "Such a response leaves no question about the ability of our agriculture industry to continue feeding the world and renewably fueling our nation."

 

Still, ethanol production is expected to consume about 30% of the nation's corn crop, up from about 14 percent last year, according to the USDA.

 

The report was less sanguine for the fledgling biodiesel industry, as farmers plant more acres with corn rather than soybeans, a key feedstock for biodiesel. The USDA reported Friday that soybean acres are down by 15% over last year. Midmorning Friday, soybean prices shot up 50 cents - the daily trading limit. By afternoon, soybeans were trading at $8.82 a bushel, up from $6.83 at the beginning of the year.

 

Driving the increased acreage for corn is a booming demand for corn-based ethanol, which has become more popular in recent years as President George W. Bush has encouraged greater use of renewable fuels. Ethanol production is expected to approach 7 billion gallons this year, up from 4.6 billion gallons last year, according to the Renewable Fuels Association.

 

Since corn is the largest input cost for ethanol, lower prices could improve the bottom lines of ethanol producers, like Archer Daniels Midland Co. (ADM) of Decatur, Ill. Ethanol profits have been squeezed recently as corn prices have climbed. Ethanol cash margins are currently about 74 cents a gallon, down from $2.41 a gallon last June, according to Pablo Zuanic, an analyst from J.P. Morgan Chase and Co.

 

Despite the growth in ethanol production, some analysts expect production to soon exceed demand - unless politicians continue to increase mandatory use of the fuel. Last week, California said all gasoline would have to be blended with 10 percent ethanol starting in 2009, providing a potential boost to the ethanol market. The US Senate recently passed energy legislation calling for increased use of ethanol over the next decade.

 

The boom in corn is good as well for many agricultural companies. Monsanto Co. of St. Louis, Mo., reported Thursday that its fiscal third-quarter profits were up by 71 percent, in part because of high demand for corn seed in what Monsanto chairman and chief executive Hugh Grant called an "extraordinary year for agriculture."

 

For the most part, corn farmers have cheered the relatively high corn prices. But in some areas of the country, a drought combined with higher input costs has put a damper on the prospect of winning big profits this harvest season.

 

Lured by the high prices of corn, Jamie Warriner, a peanut farmer in Georgia, planted 400 acres of corn this year, up from zero the year before. But because of a drought and high fuel and fertilizer costs, he is spending more money on growing and irrigating the crop than he expected. "We have a decent crop of corn, but it's not going to make any money," Warriner said.