Midwest flooding may boost corn-based ethanol prices

Gasoline prices also may be boosted

By Tom Stundza -- Purchasing, 6/17/2008 8:30:00 AM

Submerged farms in parts of five Midwest states have driven corn prices at the Chicago Board of Trade to record highs just under $8 a bushel with forecast of $10 becoming commonplace. “It's the worst in recent memory, at a time when demand has never been higher” for food, feed and to supply ethanol plants, analyst 

Gavin Maguire with Iowa Grain in Chicago tells the Reuters News Service.

A key issue is that lower corn supply will boost the price of ethanol and, by extension, raise at-the-pump gasoline prices. "If it's simply economically impossible to make ethanol, then (the government) may have to amend or suspend the Renewable Fuel Standard," analyst Pavel Molchanov at Raymond James and Associates tells Reuters.

This year's average corn crop yield already has been cut 3% by the U.S. Department of Agriculture to 148.9 bushels an acre, down from its previous estimate of 153.9 bushels. Estimates show 3 million acres of corn is under water and probably 2 million didn't get planted. That’s 5 million acres and one acre of corn can produce around 500 gallons of ethanol, which the Iowa Corn Promotion Board says is enough to fuel six cars for one year with a gasoline blend containing 10% ethanol.

The Tennessean newspaper in Nashville says floods in the Midwest have highlighted the question of the effectiveness of using ethanol to help ease gas prices. So, the threat of a substantially smaller corn crop this year is an economic threat because ethanol producers, spurred by billions of dollars in government subsidies, are consuming more and more corn. Congress mandates that gasoline companies use ethanol in the fuel they produce and, in return, gives these firms 51¢/gallon in tax credits.

A Dow Jones News Service report says that 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. The 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. Beyond the 51¢/gallon tax credit, U.S. corn-based ethanol also is protected by an import tariff to help keep foreign supplies out. And, 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.