November 6, 2006

 

Corn prices booming as US ethanol industry heats up

 

 

The booming ethanol-fuel industry is rewriting the rules of the US agricultural economy with big implications for other corn users.

 

Over the summer, the corn-to-fuel industry was experiencing windfall profits as the price of oil soared. Those outsize profits have since retreated to more moderate levels, cooling the fever for the stocks of producers such as Archer-Daniels-Midland and snarling some initial public offerings.

 

But the ethanol industry's continuing expansion and its ravenous appetite for corn are helping ignite the biggest bull market for grain since the 1970s, when the former Soviet Union suddenly emerged as a huge customer.

 

The price for corn--the no.1 crop in the US--has jumped nearly 55 percent since mid-September, when US corn farmers began harvesting their third-biggest crop ever. Grain prices usually slump to their lowest levels of the year during the harvest season. Yet the price of corn in recent weeks has shot through the rarely breached US$3-a-bushel mark and appears headed higher.

 

"The consequences of ethanol are the biggest thing going on in agriculture today," says Keith Collins, chief economist of the US 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 portends headaches for global food producers, which have benefited for nearly a decade from an abundant and cheap supply of ingredients made from US crops, such as corn.

 

Corn is used for everything from fattening pigs and chickens to making soda pop and breakfast cereal. The corn rally is hitting packaged food brands already coping with a sharp run-up in wheat and sugar costs this year.

 

The trend is also bruising some livestock farmers. Dairy farmer Mike Aardema, who milks 4,000 cows near Burley, Idaho, says the corn rally is increasing his livestock feed costs by hundreds of thousands of dollars a year. He usually spends about US$6 million annually on rations.

 

"I don't like this ethanol boom," says Mr. Aardema, who worries that he might have to cut production if corn prices continue to climb. A dairy cow must eat roughly 10 pounds of corn daily in order to produce milk. In the ranching industry, it takes six pounds of corn to produce one pound of beef.

 

This rally is the first in decades that is not driven by crop disasters or surges in export demand, but by a surge in ethanol demand. The ethanol industry is still so profitable, thanks in part to federal tax incentives and state mandates, that analysts are beginning to calculate that it would take corn prices of US$4 a bushel to quell the industry's demand. A level that high would send an inflationary ripple through many products in the American shopper's grocery bag.

 

Dan Basse, president of AgResource Co, a Chicago commodity advisory firm, said that corn prices will have to rally a lot more from current levels before it will slow down investments in ethanol production. Until then, corn demand from ethanol plants is expected to stay high.