Des Moines Register
10-29-06
How high will corn prices climb?
Booming ethanol industry helps drive up demand for Iowa corn
By ANNE FITZGERALD
REGISTER AGRIBUSINESS WRITER
Iowa corn prices continue to climb, defying the long-standing tradition of slumping prices during harvest.
This fall, grain farmers, livestock feeders, ethanol manufacturers, economists and others wonder how high prices will go.
"We don't have much room for error," said Ron Gates, commodity manager at Lincolnway Energy, an ethanol manufacturer near Nevada.
Last week, cash corn prices at some Iowa locations topped $3 per bushel - double price levels a year ago and the highest harvest time cash market prices seen since 1995, said Don Roose, president of U.S. Commodities Inc. in West Des Moines.
"What we have is a contra-seasonal market going, and these are very dangerous markets" with explosive upward potential, he said. The danger - for buyers and sellers - lies in the volatility.
As happened in the mid-1990s, many end users had waited for prices to hit harvest time lows before locking in prices on the grain they will need in 2007. Now, those buyers are racing to capture prices before they climb higher.
"The scramble is on," Roose said.
Robert Wisner, an Iowa State University Extension economist, called the price increase "remarkable," especially at this time of year.
The trading price of December 2006 corn futures hit the contract low of $2.33per bushel. Futures prices typically are higher than cash prices, but the price fluctuations in the cash market tend to parallel those in futures markets.
"Because of the volatility that we have had in the market, it could be a very challenging one to operate in" for grain elevator operators and others in the business of buying and selling corn, Wisner said.
For end users who had not locked in prices for new-crop corn, the market will be especially challenging, he said. "I don't think most users had heavy coverage before this run-up in price," Wisner said.
Policymakers and taxpayers also are watching the grain market. Federal farm program payments likely will decline, if the recent run-up in corn prices persists into next year, market analysts said. Federal farm subsidies hit a record $24.3 billion in 2005, but they are expected to fall short of that this year and next.
"This is a windfall for the federal budget," Roose said.
On Friday, West Central Cooperative bid no less than $2.91 per bushel of corn for delivery before December at its 17 grain handling locations. The same day, 10 grain elevators owned by the co-op, one of the largest in Iowa, bid at least $3 per bushel of corn for December delivery, and all locations bid that much for January delivery. At other farmer-owned cooperatives, bids were similar: high and going higher.
A smaller-than-expected U.S. corn harvest is partially responsible for escalating prices. On Oct. 12, the USDA forecast a 2006 U.S. corn crop of 10.905 billion bushels, down from the 11.114 billion bushels forecast in September.
If realized, the most recent production projection would mean U.S. farmers are harvesting their second-largest corn crop ever. Even so, it will not be large enough to meet expected corn demand of 12 billion bushels.
The USDA will update its 2006 crop production forecasts on Nov. 9, and some market analysts expect the department to reduce the corn production figure again, which would compound the problem.
On the demand side, the booming biofuels industry is the primary factor driving prices higher. In the United States, corn is the main feedstock for ethanol, a fuel additive, and as existing plants are being expanded and new ones open, demand for corn is climbing.
Since 2000, annual U.S. ethanol production has quadrupled to about 4.5 billion gallons, and that number is expected to double by 2008, said John Miranowski, an ISU professor of economics and a speaker at a biorenewables forum in Ames last week. By 2015, U.S. ethanol production is expected to reach 15 billion gallons, while commercial production of biomass-based ethanol, made from cellulosic material such as cornstalks, is expected to be widespread, he said.
Iowa, the nation's top corn producer, is also the No. 1 producer of corn-based ethanol, producing about one-third of the national total. Now, business, university and government leaders want to ensure the state has a leading role in biomass, or cellulosic, ethanol production as well.
"There is a demand for corn like we've never seen before, and I think we will see demand for cellulosic biomass like we've never seen before," said Robert Brown, director of ISU's Office of Biorenewables Programs, who also spoke at the event.
What happens with corn prices will affect the booming corn-based ethanol industry, and farmer-investors in plants that manufacture the fuel additive will feel the impact - for good and for bad. The plants they own may have to pay more for the corn they buy, cutting into profits, but farmers with corn to sell will be able to capture higher prices.
The markets also could have an impact on Iowa. With the 2006 Iowa corn crop expected to total about 2 billion bushels, a 10-cent swing in corn prices, much less a $1-per-bushel shift, either way, would ripple throughout the state's economy, economists said.