Inexpensive and abundant corn helped move the ethanol industry into the alternative-fuels fast lane. With corn prices now at record highs, demand outpacing supply and crop losses inevitable with the Midwest floods, ethanol production could soon be stalled, says Chris Hurt, a Purdue University Extension ag economist.

As corn prices continue climbing, fewer ethanol producers can afford the feedstock, Hurt says. In turn, domestic livestock producers and foreign buyers are finding it more difficult either to pay the high prices or obtain the grain they need.

"The ethanol industry is struggling to pay for corn that has reached the $7/bu. level," Hurt said. "So the ethanol industry may also experience losses and might not be able to bid the price. That will depend on what oil prices and, therefore, ethanol prices, are.

“Everybody is trying to evaluate how many bushels of corn we have lost because of weather-related damage, what the implications are for prices and who can pay these high prices. The answer today is that hardly anyone can pay these kinds of prices and still have positive margins."

Before planting started this spring, prospects dimmed for a corn crop approaching the 2007 record of 13.1 billion bu. In March, the USDA projected farmers would plant 86 million acres of corn nationwide – an 8% decrease from this past year. Following a wet early spring that delayed planting in some states and then this month's devastating floods, USDA adjusted its harvest estimate to 76 million acres and production to 11.7 billion bu.

Using a similar 1993 Midwest flood as a model, Hurt estimates U.S. corn production could drop below 11 billion bu. this year. That's not nearly enough corn to go around, he says.

For starters, the U.S. ethanol industry needs 4 billion bu. of corn this year – or 1 billion bu. more than 2007 – to meet anticipated production, Hurt says. Plus, livestock producers used 6.15 billion bu., and foreign buyers 2.45 billion bu. of U.S. corn in 2007. Both sectors could buy at least that much corn this year, if it were available and more favorably priced, he says.

Usage will have to come down, he adds, most likely from the livestock and foreign sectors. "USDA has said that if the ethanol industry gets 1 billion more bushels of corn, it means the domestic livestock industry will have to cut back 16% in feeding corn," he says. "And then our foreign buyers will have to cut back 18%."

Adding to the supply shortage and, ultimately, higher corn prices is the ongoing devaluation of the U.S. dollar.

"Another important part in who is going to be able to pay the price for corn is the exchange rate of the dollar," Hurt says. "When their currencies are strong, the foreign sector's currency goes a long way in the U.S. If we should see our dollar weaken more, the foreign buyer is going to be able to stay in and pay these prices. That says that the domestic livestock feeder might have to bear even more of the consequences."

Corn growers came into the 2008 crop year needing to produce a bumper crop to satisfy the burgeoning grain demand. Those plans likely were drowned out by floods in much of the Corn Belt.

In four of the hardest hit corn-producing states – Illinois, Indiana, Iowa and Missouri – nearly 50% of the corn crop was rated Fair to Very Poor, as of June 22, according to the USDA's National Ag Statistics Service.
-- Purdue University