is already down 40 percent since the turn of the century, thanks to the
high price of natural gas. Besides, the biggest bet there - CF Industries (CF) -
is already up 200% in the last year. How much higher could it actually
go?
Downstream Effects
Higher corn prices have ripple effects across the food (and energy) chain.
Beef, hog and poultry producers are facing higher feed costs. So far there
haven't been big jumps in cattle or hog futures, in part because some producers
are just dumping meat onto the market before they normally would, just to avoid
time at the feed lots. But as corn continues to go up, it may just be a matter
of time.
Ethanol, on the other hand, is reacting much more quickly.
Ethanol (AC, CBOT)
VeraSun Energy Corp announced Monday that it will delay the opening of two new ethanol plants due to the high
cost of corn. The two plants were going to add an additional 220 million gallons
of capacity per year. Elsewhere in the industry, Citigroup analyst David
Driscoll raised concerns in a report quoted by the Financial Times, that
small-to-midsize ethanol plants across the country may close due to high corn
prices. He estimates that could result in a decrease of 2 billion to 5 billion
gallons of ethanol capacity in the coming months.
More immediately, the flood is having a direct effect on operational ethanol
plants. On Friday, the Iowa Renewable Fuels Association prepared a report on the
status of Iowa's ethanol and biofuel industry after the floods. Their
conclusion? "IRFA estimates that over 300 million gallons (annualized) of
ethanol production is currently off-line." Since Iowa produced roughly 2.1
billion gallons in 2007, that means about 14% of their capacity is sitting idle.
Finally, damage from the flood and dangerous water conditions have
temporarily closed parts of the Mississippi River to commercial traffic. Barges
transport grain down river, and coal and fertilizer up river. Without this
Twainian highway, companies have to find alternate routes to transport their
goods. Unfortunately, many railway and road bridges have been damaged or are
closed for inspection. Time to look at Huck Finn's raft again.
Lower production, not surprisingly, is leading to higher costs: ethanol
futures have jumped 50 cents a gallon on the CBOE in the past month, as
producers react to higher input prices by cutting production.
It's easy in ags to relax once the weather clears up. But this time, it's
gonna hurt all year long.
