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Ethanol’s Forecast

Rain and floods in the corn-growing Midwest could drive up the costs of producing the biofuel.
June 12, 2008

Heavy rains, flooding, and cool weather in the Midwest will likely lead to much lower corn yields this year, especially in comparison with the bumper crops seen last year. This week, the United States Department of Agriculture lowered its predictions for this year’s corn crop by 390 million bushels, from 12.1 billion to 11.7 billion. If its predictions are right, corn supplies for next year will be the lowest since crop shortfalls in the mid-1990s, likely driving already record-high prices for corn even higher.

Field flooding: Water from the Iowa River submerges farmland south of Iowa City on Tuesday.

In recent months, demand for corn used to make increasing amounts of ethanol has driven up corn prices, and to some extent food prices. But now bad weather in the Midwest, which has delayed corn crops, could further drive up corn prices and lead to significantly more expensive food, particularly meats. The weather problems could also cause some ethanol plants to shut down.

Corn futures prices have risen in the past week to record prices of more than $7 a bushel. As recently as January, corn was selling for less than $4 a bushel, and two years ago it was selling for just over $2. The current high corn prices could cut into the profit margins of ethanol producers, who rely on corn as a feedstock. At today’s prices, corn represents roughly 76 percent of the cost of producing ethanol.

If corn prices rise further–and some predict that they could reach $8 a bushel or more–this could force some ethanol plants to shut down, says Wallace Tyner, a professor of agricultural economics at Purdue University. Ethanol producers in the United States made 6.5 billion gallons of the biofuel last year, and almost all of it is made from corn. If crop shortages are bad enough, ethanol production could fall by a billion gallons compared with predictions for this year, Tyner says, and that could lead to higher fuel prices in areas that use a lot of ethanol.

Click here to view more photos of the flood from

Still, the higher corn prices have been somewhat offset for ethanol producers by the skyrocketing price of petroleum, which has, in turn, kept biofuel demand high. Douglas Tiffany, a research fellow at the University of Minnesota, estimates that with oil prices above $130 a gallon, at least some ethanol producers could afford to pay as much as $9.50 a bushel for corn.

Indeed, agricultural experts say that rising corn prices could hit the livestock industry, which depends on corn for feed, even harder than they could hit ethanol producers, who can afford to pay higher prices for corn than livestock producers can. And that could further exacerbate complaints that increased use of ethanol is damaging the agricultural economy.

High corn prices, even without the recent weather problems, have the livestock industry struggling, losing hundreds of dollars on every head of cattle, says David Anderson, a professor of agricultural economics at Texas A&M University. A spike in corn prices due to the weather will exacerbate the problem, he says. He expects that feedlots will shut down and ranchers will need to cut down the size of their herds. Ultimately, that means that the price of meat will rise considerably, likely by 10 percent, Anderson says.

The Midwest’s weather problems are underscoring another shortcoming of biofuels: their susceptibility to crop failures.

At this point, there is only a small chance that this year’s crops will recover, Tiffany says. For that to happen, “things would have to go perfect from here.” Because of the bad weather in the Midwest, he says, “the stage is set for what may be punishing times.”

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