Bad tidings for ethanol

NEW YORK (CNNMoney.com) -- Friday's closely watched U.S. Department of Agriculture crop report could serve as a gloomy bellwether for the nation's ethanol industry.

Despite projections of a record harvest, many analysts are expecting corn prices to surge over the next several months as farmers give back this year's unprecedented corn plantings of about 90 million acres to wheat and soybeans.

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Corn is expensive to produce and the relentless demand for it - the primary ingredient in U.S.-made ethanol - caused disruptions this year in normal crop rotations. But analysts said stronger-than-expected soybean and wheat prices will cause farmers to go back to planting those crops instead of replacing some of their acreage with corn, as was the case this year.

Farm Futures Daily this week predicted the USDA report will show a corn yield of 12.64 billion bushels, a record generated by the massive demand from ethanol producers. FFD analyst Arlan Suderman said an additional 77 ethanol plants expected to come on line by 2009 will only drive that demand up.

"Yet many farmers are losing interest in maintaining this year's acreage as input costs to produce the feed grain continue to rise," Suderman said. "As such, a substantial rally in corn prices is likely in the months ahead."

Some analysts, including Purdue University's Christopher Hurt, contend that a yield of more than 13 billion bushels is unlikely but possible, and that could keep prices manageable from the ethanol industry's perspective.

But a move more toward the Farm Futures Daily prediction, which is slightly less than USDA projections earlier this year, is likely to result in a runup for corn prices. Corn for December delivery stood at $3.42 a bushel early Tuesday, but corn futures for March 2008 delivery were at $3.57.

"The biggest of the swing factors is just how many of these ethanol plants get built and whether they essentially will be willing to operate at capacity with the price of corn at these levels," Hurt said. "If we see corn much above $3.50 a bushel, then I think it will probably slow down some of these ethanol plants that will be built."

Mike Chisalm, general manager at the Kansas Ethanol plant under construction in Rice County, said he and others in the industry are closely watching corn prices and are concerned with what Friday's report will show, and how that will affect the industry. The plant is expected to open early in 2008 and will produce 55 million gallons of ethanol a year.

Yet there is concern that an unpredictable corn market that saw prices as high as $4.25 a bushel just a few months ago could hamstring the corn ethanol industry.

"We're watching it on a daily basis," Chisalm said. "As we move closer to bringing our plant online, the price of grain will essentially dictate the profitability of the facility, since it's such a major component."

Chisalm said he already is seeing a pullback in the industry and expects other companies to postpone or cancel their plants to open new ethanol facilities or to switch over to plant-based, or cellulosic, ethanol.

Elaine Kub, grains analyst at Omaha, Neb.-based agriculture consultant DTN, predicted corn could take another run at $4 a bushel as farmers look to return some acreage to wheat and soybeans.

"I think some people will realize it's just foolish to base decisions on short-term prices rather than fundamentals on what land can grow," she said.

Indeed, planting soybeans and wheat this year has proven to be quite profitable. Soybean futures for November delivery are soaring at $8.56 a bushel, while wheat has been trading at 11-year highs, with December delivery set at $6.82.

As far as Friday's report is concerned, Farm Futures Daily is predicting soybean yields to come in lower than projected, which Terry Francl, senior economist at the American Farm Bureau Association, predicts could lean to more soybean acreage next year.

Wheat yields, meanwhile, have suffered due to worldwide drought, which has driven demand for U.S., crops even though domestic production has dropped as well. Farm Futures Daily forecasts a significant decline in wheat stocks than what the USDA had been anticipating.

"Anecdotal reports tell of farmers leaving more than a third of their wheat unharvested in many areas of the highly productive region of south-central Kansas and north-central Oklahoma," Suderman said. "Herein lies the greatest potential for a surprise in Friday's report."

Suderman expects continued high export demands for wheat to heighten the battle with corn for acreage in 2008, another factor that could drive up corn's price.