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Midwest Floods Push Grain Prices Higher, Weigh on Ethanol

By LAUREN ETTER
Wall Street Journal, June 14, 2008; Page A3

The effects of flooding in the Midwest are rippling across and beyond the Great Plains, striking at the ethanol industry, hog farmers, pork producers and even catfish farms as grain prices continue to soar.

Cities in Iowa, Wisconsin, Illinois and Missouri sandbagged levees to keep them from bursting and urged residents to seek higher ground. River levels in some places have surpassed records set during a flood in 1993, considered the worst in recent history.

The entire state of Iowa is experiencing flood conditions, according to the Army Corps of Engineers. In Cedar Rapids, population 124,000, a railroad bridge collapsed, 3,000 homes were evacuated and a downtown hospital had to be evacuated. Experts say Iowa's Cedar River could crest above 30 feet -- more than 10 feet higher than its crest of 19.27 feet in 1993. Heavy rains are expected to continue across the Midwest at least through Monday, though drier, sunnier weather is forecast next week.

The flooding threatens to wipe out farms' crops of corn or soybeans, and this has pushed prices to record levels. On the Chicago Board of Trade Friday, corn prices hit a new record high of $7.3175 a bushel, while soybeans traded near record highs, closing at $15.60. Corn prices have climbed about 10% in the past week, threatening to put further upward pressure on food prices that have been climbing for a year.

Bill Lapp, an economist at consulting firm Advanced Economic Solutions, Omaha, Neb., and former chief economist at ConAgra Foods Inc., said higher grain prices brought on by poor weather will help push food prices up by 9% a year through 2012, including this year. Last year, food prices rose by 4%, and the Department of Agriculture estimates they will rise by as much as 5.5% this year.

Higher corn costs are cutting into profit margins of corn-fueled ethanol producers nationwide. At VeraSun Energy Corp., of Brookings, S.D., one of the nation's biggest ethanol producers, shares have fallen by about 14% in the past week and were at $4.81 in 4 p.m. New York Stock Exchange composite trading Friday. Shares of Denver-based BioFuel Energy Corp. are down more than 30% in the past week and were at $3.12 in 4 p.m. trading on the Nasdaq Stock Market.

At least five small to midsize ethanol plants have shut down recently, according to David Driscoll at Citigroup, who declined to disclose the names of the plants. He warned that these closures are the "tip of the iceberg."

The Iowa Renewable Fuels Association said Friday the flood has caused 300 million gallons of ethanol production, on an annual basis, to be forced off line and that could quickly grow to 400 million gallons.

The higher corn prices are also hurting big grain processors like Archer-Daniels-Midland Co., of Decatur, Ill., which turns the grain into products from corn syrup to ethanol. BMO Capital Markets downgraded ADM's stock to "market perform" Thursday. The shares lost 12% over the past week and were trading at $32.61 Friday. Employees were deployed "where needed" to fill sandbags, and one of its corn-processing facilities at Cedar Rapids isn't operational, according to a company spokesman. Also, ADM says that throughout its Midwest operations it is "experiencing constrained logistics because of the closure of railways, roadways and the Upper Mississippi River."

THE FOOD CRISIS

Expectations for tighter ethanol supplies because of higher corn prices could increase demand for gasoline, in turn helping to force up gas prices. The squeeze on ethanol also could heighten calls for the federal government to suspend its requirement that nine billion gallons of biofuels be blended into gasoline by the end of this year.

In the South, some catfish farmers who rely on corn to feed their fish are plowing over their ponds.

Hog producers are being hit, too, as they pay higher prices for grains to feed their pigs.

Thursday, credit-rating firm Moody's Investor Service said it had put Smithfield Foods Inc. under review for a potential downgrade to its credit rating. The meat company recently reported a 94% drop in fiscal-fourth-quarter earnings. Chief Executive Larry Pope said last week that higher feed costs are partly the result of increased ethanol use.

Midwest floods send corn prices soaring past $8 a bushel

USA TODAY
By: Sue Kirchhoff
June 17, 2008

Corn prices surged to a record Monday, with some contracts briefly topping $8 a bushel for the first time as traders bet that a major swath of this year's corn crop will be lost to Midwest flooding.

The concerns were underscored after the markets closed, when the U.S. Department of Agriculture estimated that 43% of this year's corn crop is in fair to very poor condition vs. 30% at this point in 2007, which eventually produced a record harvest.

USDA last week reduced its estimate for corn production, given severe Midwest flooding and heavy rain, while predicting corn supplies could fall to the lowest level since 1996. Farm Futures magazine said more than a third of producers responding to an online poll hadn't been able to plant a full crop.

Preliminary reports are dire enough that corn for July delivery has surged from about $6 in late May to close Monday at $7.325 a bushel on the Chicago Board of Trade. Some corn contracts for later months rose above $8 before settling lower.

Though farmers, food companies and ethanol producers don't yet have a good read on the ultimate size of the corn crop, it's clear that supplies will be tighter and consumer prices higher.

VeraSun, the nation's largest ethanol producer, will delay bringing two new plants on line because of high corn prices, the company said Monday. Share prices for poultry producer Pilgrim's Pride and pork processor Smithfield Foods have taken a beating in the stock market as the price of corn feed has been escalating.

Bill Lapp, a principal at Advanced Economic Solutions in Omaha, said high corn prices could lead to higher meat prices six to 18 months from now as feed costs lead to reduced production.

"One area that has yet to have increased (feed) costs … translated into higher food prices is the beef, pork and chicken side of the business," says Lapp. "That's where we have to be most aware."

Lapp expects U.S. food inflation to hit a 9% average annual rate through 2012. Consumer food prices have been rising at a 6.3% seasonally adjusted annual rate this year. Earlier in the decade, food prices rose at an average 2.5% annual rate.

Floodwaters are beginning to recede in Iowa, but weather problems are not over in the Midwest. (Story, 2A.) In Missouri, where many fields are already waterlogged, farmers are nervously watching for flooding.

Charles Kruse, a fourth-generation farmer and president of the Missouri Farm Bureau Federation, said, in some areas, "the water is really high; it's going to be a good while before" it dries out.

"We are now preparing for the rise in the Mississippi," says Kruse. "All across the northern half of the state of Missouri and down the west side, we've just had so much rainfall that it has damaged crops."

U.S. Food Inflation Rate May Be 9% Through 2012, Economist Says

By Alan Bjerga

June 12 (Bloomberg) -- U.S. food prices may rise 9 percent a year through 2012 as biofuel production depletes corn supplies, a former chief economist for ConAgra Foods Inc. said.

U.S. food prices may gain as much as 5.5 percent this year, the most since 1989, the U.S. Department of Agriculture said last month. That rate will accelerate as grain supplies dwindle, said Bill Lapp, who is now president of commodities research firm Advanced Economic Solutions.

``Corn is the king among agricultural commodities,'' Lapp said today on a teleconference. ``When we have high prices for corn, it reverberates'' among crops including wheat, soybeans and rice, as well as grain-fed livestock.

Lapp detailed his findings in a report released today and on the call for ``Food Before Fuel,'' a joint effort of companies including Kellogg Co. and Tyson Foods Inc. to reduce U.S. biofuel-use requirements.

U.S. corn production may drop 10 percent from last year and inventories may decline to a 13-year low before the harvest next year because of heavy rains, the USDA said in a June 10 report. Corn, the main source of ethanol in the U.S., is the nation's biggest crop, valued at $52.1 billion in 2007, followed by soybeans, hay, wheat and cotton.

Worldwide, prices for commodities such as wheat and rice were 43 percent higher in April than a year earlier, according to the Food and Agriculture Organization in Rome. The World Bank has said civil unrest may occur in 33 countries because of shortages and high costs.