Friday, June 1, 2007

Corn Prices and Ethanol: No Worries To Date

The U.S. Department of Agriculture released the May agricultural prices report yesterday at 3 p.m. and corn prices, at $3.48 per bushel, were up 9 cents from last month, $1.31 above May 2006 and 4 cents above February and March levels. The report measures the average prices received by farmers for corn and other crops

Farmers and other agriculture experts expect corn prices to continue to rise as ethanol producers like Archer Daniels Midland Co. (ADM) and Pacific Ethanol (PEIX), Verasun (VSE) and The Andersons (ANDE) drive demand for corn. Investors had expected the high corn prices to hurt profits at ethanol producers but in fact all but Verasun correctly hedged against the spike and actually reported an improvement in corn processing results despite never before seen high corn prices. ADM actually reported a 15% improvement in corn processing operation in Q1 2007 despite the then record prices. The increase in prices seems to have actually helped corn processors as they were easily able to pass along the increase to end users of HFCS like Coke (KO) and Pepsi (PEP)
Ethanol producers are in a very unique position to hedge against input price increases. Further corn prices increase, based on results over the past year, far from hurting profits should actually helped them. It would seem the only danger ethanol producers face is rapidly falling oil prices but with an active (surprise!!) hurricane season being forecast, that is not likely to happen anytime soon.

After hovering around $2 a bushel for about a decade, corn prices have vaulted past $3. Last month the average price per bushel of corn was $3.20, up more than 50 percent from $2.11 in the same month last year. The elevated corn prices have driven up prices of other commodities as farmers dedicate fewer acres to crops like beans and grain. The USDA expects corn prices to peak at $3.75 a bushel by 2009 and then begin a steady decline after that.

About 90.5 million acres of corn are expected to be planted this year, up 15 percent from 2006 and the most in over 60 years.

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