July 31, 2007

 

Ethanol makers' prospects up as rains aid Midwest corn crop

 

 

Corn farmers aren't the only ones who have been thankful for rain in the last few weeks.

 

Ethanol producers are also happy that the rain helped the corn - their main ingredient - rebound from what was shaping up to be a mediocre growing season.

 

Rain has fallen off and on through most of July in parts of the central and eastern Corn Belt, just as the crop started pollinating. The rain has improved the health of the crop and, to the delight of ethanol makers, has driven down corn prices.

 

"This has really helped to increase the profitability for ethanol producers," said Rick Kment, an ethanol analyst with DTN, an Omaha, Nebraska-based agricultural market information company.

 

Farmers planted a record 92.9 million acres of corn this year, based largely on the expected demand for ethanol. Production of the fuel additive has risen more than 40 percent since 2004, according to the industry trade group Renewable Fuels Association, with demand increased by high oil prices.

 

But a lot of that crop grew under sunny, cloudless skies through June, leading to worries that all those acres might yield relatively little corn.

 

Then came the rain, as much as 6 inches so far in July in eastern Iowa and western Illinois, according to the Midwestern Regional Climate Centre. Iowa is the country's top corn producer and Illinois is No. 2, accounting between them for 30 percent of corn planted in the US this year.

 

In mid-June, a little more than half of Illinois' corn crop was in good-to-excellent condition, according to the US Department of Agriculture. Last week, that figure was 81 percent. In Iowa, it was still healthy at 63 percent, held down by dry conditions in the western end of the state.

 

"It's no big mystery why the good-to-excellent rating for corn is at 81 percent," said Emerson Nafziger, a University of Illinois crop expert. In one week alone, an average of almost 2 inches of rain fell across Illinois, he said.

 

Nationwide, 62 percent of the corn crop is in good-to-excellent shape, according to the USDA, and a quarter is considered to be at least fair.

 

Corn prices, which have been easing since hitting US$4 a bushel in February, have responded. A DTN price index of cash-market corn - which accounts for most of the corn used to make ethanol, according to Kment - stood just under US$3 on Friday.

 

The price drop, Kment said, has pushed a lot of investment funds out of the corn market in the past few weeks, taking even more air out of prices.

 

"You can make very good returns at US$3 corn," said Dave Nelson, chairman of Minneapolis-based Global Ethanol LLC, which has plants in Iowa and Michigan. "When it gets to US$4, it gets pretty tight."

 

The prospect of an abundant crop has also convinced some Wall Street analysts who follow publicly traded ethanol makers that corn prices will fall further and improve the companies' returns.

 

Citibank initiated coverage last week of two ethanol makers, VeraSun Energy Corp. (VSE) of Brookings, S.D., and Denver-based BioFuel Energy Corp. (BIOF), with buy recommendations.

 

"A meaningful decline in corn prices would suggest the potential for improving profitability and drive ethanol stock prices up," Citibank analyst David Driscoll, who expects corn prices to level off at US$2.75 a bushel in the long term, wrote in a note to investors.

 

The corn harvest will start late next month in the southern US and will run through November, meaning a lot could still happen to this year's crop, Kment and others caution.

 

But Nafziger is optimistic that the promise many farmers in Illinois now see in their fields will be fulfilled.

 

"We sometimes have surprises after this, but I guess in my experience the crop is as close to safe at this point as it's ever been," he said.