Ethanol Makers: Who'll Stop the Rain?

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Tired of hearing bad news about the ethanol sector? For a change of pace, how about some really dismal news?

Heavy rains in the Midwest are triggering floods and imperiling corn crops. So corn prices, which have been surging higher on rising demand, are now being pressured by the likelihood of tighter supplies. Some are comparing the rains to those in 1993, when the Mississippi flooded surrounding corn fields.

This is exactly what ethanol makers didn’t need. Corn futures on the Chicago Board of Trade rose 4 percent to yet another record Thursday. Reuters says they have risen 80 percent in the past year, and 17 percent in the past month alone.

Citing the floods, Citigroup downgraded BioFuel Energy (BIOF) and VeraSun (VSE) to sell from buy and Archer Daniels Midland (ADM) to hold from buy. “In the last 10 days, the world has changed in the corn market with massive flooding causing irreparable damage to this year’s corn crop,” a Citigroup analyst wrote.

For ethanol stocks, this added up to a very bad day. Shares of VeraSun dropped 12 percent on Thursday, while ADM and Corn Products International both saw their shares give up 10 percent, and Pacific Ethanol stock sank 15 percent. None, however, matched BioFuel Energy, which lost nearly a quarter of its value.

Often, with declines like these, contrarian investors start looking for good news. But there isn’t much to find yet. The Agriculture Department recently cut its estimate for this year’s corn harvest to 11.7 billion bushels of corn from 12.1 billion. That’s 10 percent smaller than 2007, and the harvest could end up even smaller if the bad weather persists.

How bad could things get if corn prices keep rising? According to Technology Review, pretty bad indeed.

If corn prices rise further — and some predict that they could reach $8 a bushel or more — this could force some ethanol plants to shut down, says Wallace Tyner, a professor of agricultural economics at Purdue University. Ethanol producers in the United States made 6.5 billion gallons of the biofuel last year, and almost all of it is made from corn. If crop shortages are bad enough, ethanol production could fall by a billion gallons compared with predictions for this year, Tyner says, and that could lead to higher fuel prices in areas that use a lot of ethanol.

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