Corn futures over $8 per bushel: “Washington may have to suspend or reduce the Renewable Fuel Standard,” analyst warns

Corn futures passed $8 per bushel for the first time yesterday, prompting fears of an ethanol wipeout. Analysts downgraded BioFuel (BIOF), VeraSun Energy (VSE) and Archer Daniels Midland (ADM), among speculation that many ethanol plants, both operating under construction, would be closed or hibernated for the duration of the price crisis. “Washington may have to suspend or reduce the Renewable Fuel Standard (RFS) because the industry ia unable to produce adequate volumes required under the mandate,” said Raymond James analyst Pavel Molchanov in a note to investors. “This is truly uncharted territory,” he added.

The “crush spread”, or the differential between the price of corn and the price of ethanol, has been reduced to $0.14 per gallon and most plants are now believed to be in cash negative territory unless they have hedged their corn purchases.

“There is no question that the rains in the last couple of weeks have taken a toll on the crop,” AccuWeather meteorologiest Dale Mohler told Marketwatch. “The corn probably has been washed out of the fields or is simply under water and just rotting.”

Corn crisis background

The US Department of Agriculture revised its 2008 corn crop forecast to 11.735 billion bushels, a 10 percent drop from 2007 and a 3 percent drop from the May forecast, owing to cold weather and rain. The report said that 2008 corn inventories were expected to drop to 673 million bushels by early 2009, a drop of 12 percent from last year. The weekly crop summary indicated that 89 percent of the annual corn crop had emerged, nine percent less than the 2007 rate. In other news, the USDA projected that soybean production would jump 20 percent from last year, but planting was also running more than 10 percent behind last year’s schedule owing to bad weather.

Wells Fargo Senior Agricultural Economist Michael Swanson projected that US farmers would plant 88 million acres of corn in 2008, and that demand in Nebraska from ethanol producers would exceed 1 billion bushels.

In 2007, farmers achieved a nationwide yield of 155.8 bushels per acre, and with yields improving 1 percent per year on the historical average, this equates to a 13.85 billion bushel corn harvest.

With oil prices expected to stay above $90 per barrel, and closing at more than $100 per barrel this past week, Swanson said that the price of corn has increased to more than $5 per bushel on futures boards, making the potential value of the US corn crop more than $69 billion, up from less than $30 billion in 2004.

The USDA recently confirmed its 2007 corn production estimate of 13.3 billion bushels, rand educed its projected use of corn by the ethanol industry in 2007-08.

The revised 2007-08 corn ethanol forecast is 3.2 billion bushels, down from 3.4 billion forecast in August. For the year ending August 31, 2007, the corn ethanol industry used 2.1 billion bushels. At current industry yields of 2.7 gallons per bushel, this translates to 8.6 billion gallons of ethanol.

The USDA’s Office of the Chief Economist released 10-year projections for agriculture. The online version is available here. The report projects a very strong outlook for world agriculture including high petroleum and energy prices, a profitable outlook for corn-based ethanol, increased global interest in biofuels production, falling US soy production, and a reduction in meat production through 2013 before a return to growth in 2014.

In the short-term, the USDA reports that soybean reserve stocks have plunged, creating conditions for further biodiesel feedstock price increases, but corn shortages eased in December according to the USDA. For December 2007 compared to December 2006, corn stocks were 10.3 billion bushels, up 15 percent. Soybean stocks were 2.33 billion bushels, down 14 percent, while wheat stocks fell 14 percent to 1.13 billion bushels.

Providing more background to the reserve stock shortages, the International Food Policy Research Institute recently released a report saying that the world is eating more food than it produces, and that biofuel production runs the risk of creating social unrest. The report projected a 66 percent increase in the price of corn and a 50 percent increase in oilseed prices by 2020, attributed to biofuel production. The report also said that global cereal stocks have fallen to their lowest levels in more than 15 years.

The International Grains Council said that it projected an increase in global wheat stocks in 2008-09 due to increased planting. Poor harvests in Australia, Ukraine and Canada resulted in significant shortfalls in production in the past year.

This week, VeraSun Energy said that it would delay the opening of two plants under construction in Welcome, Minnesota and Hartley, Iowa. The company said that it would continue construction on three plants, citing financial conditions for the delay. ICM president David Vander Griend commented “The best plant to shut down is one you haven’t started yet. With ethanol priced $1 a gallon below gasoline on the rack and corn futures hitting $7.50 today, the numbers just aren’t there.”

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