US cash corn could hit $8 on floods - analyst

17 June 2008 20:49  [Source: ICIS news]

HOUSTON (ICIS news)--US cash corn prices could reach at least $8/bushel this year, a result of midwest flooding, adding more pressure to already tight ethanol margins, an analyst said on Tuesday.

Already, US ethanol producer Verasun has delayed the opening of two ethanol refineries as a result of tight margins for the fuel.

Small and midsize ethanol producers are running at losses, according to a research note by David Driscoll, an analyst with Citigroup. Many, if not all, will shut down in the next few months.

US ethanol capacity could fall by 2bn-5bn gal/year, representing 750m-1,900m bushels/year of corn demand, Driscoll said.

High corn prices could create political pressure to divert grain supplies away from biofuels production and into the food market, Driscoll said.

The Grocery Manufacturers Association (GMA) is planning a high-profile campaign against biofuels, Driscoll said. In addition, 24 senators - including presidential candidate John McCain - sent on 2 May a letter to the Environmental Protection Agency (EPA), urging it to waive a portion or all of the Renewable Fuels Standards.

"It appears that opposition against the ethanol industry is gaining momentum with the current flooding in the all-important mid-corn-belt region, adding fuel to the fire and increasing the potential for political intervention into the ethanol market," Driscoll said.

The Renewable Fuels Association (RFA), a US trade group, said the effects of the price run up could be partially offset by last year's record corn crop and global increases in production.

"Abandoning our commitment to ethanol and biofuels, as some would suggest we do, would do nothing to provide meaningful relief from high grain prices today or in the future," according to a statement by Bob Dinneen, president of the association. "It would absolutely force the price of gas through the roof and require the import of more record-high foreign oil.”

The rise in corn prices is caused by record flooding in the nation's corn belt.

The National Weather Service said flood warnings had been issued for 40 counties in Iowa. The state's governor has issued disaster proclamations for 83 counties, which allows them to access a state assistance programme.

In the state, 1.2m acres are underwater, representing 9% of planted corn in Iowa, according to a research note by Kevin McCarthy, an analyst with Bank of America. As such, corn crop conditions continue to deteriorate.

McCarthy said 57% of the crop is considered to be in good or excellent condition, compared with 60% the previous week and 70% in 2007. In addition, 12% is considered to be in poor or very poor position.

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By: Al Greenwood
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