Inexpensive and abundant corn helped transition the ethanol industry into the fast lane. However, with corn prices now at record high levels, ethanol production could be forced to slow down.
”As corn prices continue climbing, fewer ethanol producers can afford the feedstock,” said Chris Hurt, Purdue University Extension agricultural economist. "The ethanol industry is struggling to pay for corn that has reached $7 per bushel," Hurt said. "So the ethanol industry may experience losses and might not be able to bid the price.” He says oil prices will be a determining factor.
For starters, the U.S. ethanol industry needs 4 billion bushels of corn this year - or 1 billion bushels more than 2007 - to meet anticipated production, Hurt said. Also, livestock producers used 6.15 billion bushels and foreign buyers 2.45 billion bushels of U.S. corn in 2007, and both could buy at least that much corn this year if it were available and more favorably priced, Hurt said.
Before planting started this spring, prospects dimmed for a corn crop approaching the 2007 record of 13.1 billion bushels. In March the USDA projected farmers would plant 86 million acres of corn nationwide - an 8 percent decrease from this past year. Following delayed planting in some states and then the devastating floods, the USDA adjusted its harvest estimate to 76 million acres and production to 11.7 billion bushels. Usage will have to come down, likely in the livestock and foreign sectors, Hurt said.
"Everybody is trying to evaluate how many bushels of corn we have lost because of weather-related damage, what the implications are for prices and who can pay these high prices. Using a similar 1993 Midwest flood as a model, Hurt estimated U.S. corn production could drop below 11 billion bushels this year. That's not nearly enough corn to go around, he said. The answer today is that hardly anyone can pay these prices and still have positive margins."
In four of the hardest hit corn-producing states - Illinois, Indiana, Iowa and Missouri - nearly 50 percent of the corn crop was rated fair to very poor as of June 22, according to the USDA's National Agricultural Statistics Service. With millions of farm acres damaged by high water, the losses to Midwest farmers stand to reach into the hundreds of millions of dollars, Hurt said.
"The USDA has said that if the ethanol industry gets 1 billion more bushels of corn it means that the domestic livestock industry will have to cut back 16 percent in feeding corn," he said. "And then our foreign buyers will have to cut back 18 percent."
"Another important part in the price for corn is the exchange rate of the dollar," Hurt said. "When their currencies are strong, the foreign sector's currency goes a long way in the United States. If we should see our dollar weaken more, the foreign buyer is going to be able to continue paying these prices. That says that the domestic livestock feeder might have to bear even more of the consequences."