WASHINGTON (Dow Jones)--Concerns are mounting quickly that a sharp drop in U.S. corn production this year could create far tighter supplies than expected, and the government has few options in averting a potential crisis pitting the ethanol industry against livestock producers in a bidding war that would further drive up corn prices.
Extremely wet weather and flooding in the Midwest is taking a sharp toll on corn production, although the full extent of the damage is still unknown as many farmers wait to see if conditions will dry up enough in time to plant.
Just last week, the U.S. Department of Agriculture lowered its 2008 corn production forecast to 11.7 billion bushels, roughly 3% less than the May forecast. The new 2008 estimate is about 10% below what farmers harvested last year, when acreage was significantly larger.
Government intervention seems likely, according to a report this week by Citi Investment Research, but that may have to come from Congress because Bush administration officials, unlike the the food manufacturing and livestock industries, don't yet seem worried.
Asked if there was anything the USDA could do if corn production estimates continued to fall, Deputy Secretary Chuck Conner suggested there was, but wouldn't comment on details. "I'm not going to speculate on our other options because of market sensitivity," Conner told Dow Jones Newswires.
"It's way too early to begin getting out there bouncing options off the wall, hitting the panic button." If the USDA does decide it needs to act, though, officials there are going to have to get "creative," Agriculture Secretary Ed Schafer told Dow Jones Newswires.
Bush administration officials may not be worried, but livestock producers who depend on corn to feed their chickens, hogs and cattle, are. Gregg Doud, chief economist for the National Cattlemen's Beef Association, said: "Cattlemen are now looking straight down the barrel of $7 (per-bushel) corn, and that may just be the beginning.
We already saw a lot of acres migrating away from corn this year, and that was before the wet spring pushed into June. By the time conditions improve in many of these fields, planting corn will no longer be an option." Chicago Board of Trade corn futures have risen dramatically due to the wet Midwest weather. July futures settled at $7.32 1/2 a bushel Monday.
And now Credit Suisse analyst Robert Moscow said the expectation that corn prices could top $8 per bushel "is getting closer to reality because wet weather in the Midwest is expected to hurt this year's yield." The USDA last week reduced its projection for corn yield to 148.9 bushels an acre, down from its previous estimate of 153.9 bushels.
Ethanol Demand
The threat of a substantially smaller corn crop this year wouldn't be nearly as terrifying to livestock producers if ethanol producers, spurred by billions of dollars in government subsidies, weren't consuming more and more corn. Congress mandates that gasoline companies use ethanol in the fuel they produce and, in return, gives them 51 cents per gallon in tax credits.
Ethanol refiners in the U.S. are now forecast to buy up to 4 billion bushels of the corn produced this year. They used about 3 billion bushels of last year's crop, according to USDA data. That 4 billion bushels would be about a third of corn production this year, assuming the USDA doesn't further downgrade its projection for the 2008 harvest.
U.S. farmers can't provide more corn, so the only other option to relieve tight supplies is to stop subsidizing and mandating ethanol production, according to livestock producers and a growing number of lawmakers.
Beyond the 51-cent-per-gallon tax credit, U.S. corn-based ethanol is also protected by an import tariff to help keep foreign supplies out, as well as a massive production mandate. A new renewable fuel standard set by Congress requires the sale of 9 billion gallons of biofuels, mostly ethanol, by the end of this year.
The standard ramps up the requirement annually until 2022, when 36 billion barrels of renewable fuels are mandated annually. But thanks to a petition by Texas Gov. Rick Perry in April, the Environmental Protection Agency is considering a one-year, 50% waiver for the mandate. Soon after Perry's petition, a group of 24 Republican senators, including presidential candidate Sen. John McCain, R-Ariz., sent a letter to the EPA supporting of the waiver.
"It isn't a surprise that food prices are rising when more than 25% of the corn grown today is taken out of the food supply and instead used for subsidized ethanol production," McCain said in a statement.
"We need to put an end to flawed government policies that distort the markets, raise food prices artificially, and pit producers against consumers." Bob Taubert, a managing partner at Minnesota-based swine and feed-producing company New Horizon Farms, blames government-supported ethanol for the high prices his company has to pay for the corn it needs.
USDA officials, he said, "do not understand the situation and use catch phrases like 'increased demand from China and India' or 'speculation in the market' to mask over the real fact that we are not capable of growing enough corn in this country to meet the current demand ... by the biofuel mandates."
National Chicken Council President George Watts offered a similar opinion: "Because poultry companies are major buyers of corn, they are among the sectors that are paying the price for the existence of this artificial market. The harm being done to these companies is severe." Bush administration officials, including Schafer and Energy Secretary Samuel Bodman, remain staunch defendants of corn-based ethanol, downplaying its effects on consumers.
The two cabinet officials, in a letter to Senate Energy Committee Chairman Jeff Bingaman, D-N.M., said "the impact of biofuels on U.S. consumers is even smaller since the farm price of commodities accounts for less than 20% of U.S. consumers' food costs."
-By Bill Tomson, Dow Jones Newswires; 202-646-0088; bill.tomson@dowjones.com
(END) Dow Jones Newswires