The government probably will hike the amount of corn U.S. ethanol makers are expected to use over the next year, a potential precursor for another rally above $6 a bushel that would pinch pork and beef producers, analyst Jerry Gidel said.
Corn used for ethanol during the 2010-11 marketing year may be raised 100 million bushels from the 4.8 billion bushels the USDA projected in its monthly supply and demand report for November, Gidel said. The USDA is scheduled to release its next supply and demand update Dec. 10.
Domestic ethanol production this year is running at a record pace as high fuel prices boosted profit from blending the corn-based additive in gasoline. Production is expected to increase further in 2011, assuming Congress doesn’t kill a federal subsidy that pays fuel makers a 45 cents-a-gallon tax credit for using ethanol.
The current demand pace “suggests that the USDA could increase ethanol demand by 100 million bushels or more” in the Dec. 10 report, Gidel, an analyst with North America Risk Management Services, said in a recent report. If that happens, corn prices “should solidify” into January, he said.
Corn futures are already up 60 percent since the middle of the year amid strong exports and a smaller than expected U.S. harvest. At today’s close, March corn in Chicago fell 6 cents to $5.67 ½ a bushel.
On Nov. 9, corn futures reached $6.05, the highest since August 2008, stirring concern that soaring feed costs will torpedo this year’s profit resurgence among pork and beef producers.
A corn rally back above $6.00 may lead to herd liquidation for pork and poultry producers as losses swell, Gidel said. Higher ethanol demand would further whittle away U.S. corn stocks that are expected to fall to a 15-year low, he said.
“If we go back to $6-plus on corn, we’re going to definitely start rationing,” Gidel said in an interview today. “That means the cost of production for the livestock area will start to be producing significant enough losses” to spur herd reductions.
“Unless we see some really amazing hog prices, we’re going to start to see some cutbacks” in the herd, the Chicago-based Gidel said.
Cattle feeders would be the last among livestock producers to feel the impact of $6 corn, partly because they can make greater use of alternative feeds, such as sorghum, Gidel said.
The ethanol industry has swallowed up an expanding portion of the U.S. corn crop after the Bush Administration enacted energy policies requiring stepped-up biofuels use in the nation’s fuel supply to reduce dependence on foreign oil.
During the 2010-11 marketing year, which ends in August, the estimated 4.8 billion bushels of corn used by ethanol makers would account for 34 percent of U.S. supplies, according to USDA data. Five years ago, the ethanol industry used 1.6 billion bushels, or 12 percent of supplies.
Recently, ethanol critics have stepped up efforts to end the federal subsidy, which is scheduled to expire at the end of December.
With ethanol still getting support from agricultural state legislators such as Sen. Chuck Grassley of Iowa, the “most likely outcome” will probably be a temporary extension of the subsidy, with further discussion expected in the new session of Congress in 2011, Gidel said.
U.S. ethanol production during the first eight months of the year totaled 8.62 billion gallons, up 24 percent from the same period in 2009, according to Energy Department data. At that pace, production for the full year will reach nearly 13 billion gallons, an all-time high.