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Ethanol Demand Sparks Higher Corn Prices

NEW YORK (AP) - Since gaining favor as an alternative fuel, demand for corn-derived ethanol has made the kerneled crop a hot commodity.

While weather and supply still largely dictate the price of corn in the commodities market, rising demand for ethanol has been nudging corn prices higher. Corn futures are up 17 percent from a year ago.

Of the total corn crop, corn for ethanol production is projected to reach 2.2 billion bushels in the year ending August 2007 - about a third of the size of the livestock feed market, which is projected at 6 billion bushels. Another 2.2 billion bushels are slated for general export.

While not the largest end market for corn, ethanol has been gleaning some market-moving.

“Ethanol has been under the radar for a long time - now it’s not,” said Steve Bruce, a corn and wheat broker with Man Financial. “The only guys making a lot of money using corn, it’s not the guys who feed chickens. It’s the guys who make ethanol.”

Demand for ethanol has risen as oil refiners have phased out a petrochemical gasoline additive called methyl tertiary butyl ether, or MTBE, and replaced it with ethanol. Many of the nation’s largest refiners made the switch in May ahead of the summer driving season.

Ethanol production capacity is currently at 4.7 billion gallons per year, up 29 percent since January 2005, said Bear Stearns analyst Ann Duignan in a client note.

Traditionally, ethanol trades about 50 cents ahead of unleaded gasoline, said Bruce. “Ethanol should be around $2.60 (a gallon) and yet we’re 90 cents higher, which says to me we’re in a little of a speculative bubble here.”

Meanwhile, noncommercial futures and options contracts in corn have ballooned to 262,930 contracts from 5,862 contracts at the beginning of 2006, according to a Merrill Lynch report.

“We do recognize that the use of corn for ethanol production is a new source of demand for corn and is having an impact on corn prices,” said Dave Lehman, managing director for commodities research and development at the Chicago Board of Trade. However, he said, the biggest factors to determine corn prices are still weather and acreage.

This year, with abundant carry-over from last year’s crop, supply is not an issue. But supply is expected to tighten in the 2006-2007 marketing year. Although the weather cooperated during this season’s planting, Lehman said acreage dedicated to corn was down 2.2 million acres in March, as farmers rotated their fields to other crops.

Carry-over for the year ending Aug. 31 is forecast at 2.2 billion bushels - “a comfortable amount,” Lehman said. However, carry-over is projected to total just 1.1 billion bushels at Aug. 31, 2007.

On the Chicago Board of Trade, July corn dipped 4 cents to end at $2.33 a bushel.

Shares of ethanol producers have made strong gains this year, boosted by growing demand for the fuel and an increasing awareness of alternative energy in the face of inflated oil prices.

Archer Daniels Midland Co., one of the world’s largest oilseed processors and the country’s top ethanol producer, has watched its shares soar 57 percent so far this year. ADM shares rose 97 cents to close at $39.74 on the New York Stock Exchange.

In its public debut, VeraSun Energy Corp. shares opened at $28 - 22 percent above the initial pricing of $23.

Pacific Ethanol Inc., a California company in the process of building five ethanol plants, saw its stock spike to a 52-week peak of $42 in early May. Although shares have slipped slightly from that high, the stock has still nearly tripled in value since Jan. 1. Nasdaq-listed shares of Pacific Ethanol dipped 22 cents to end at $21.11.

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