Has Corn Hit Its Peak?

A new report takes the pressure off ethanol producers and others dependent on the yellow grain—for now

by Alex Halperin

Corn prices had to take a breather at some point. After an eye-popping ascent in 2006, prices for the yellow grain fell on Mar. 30 after a highly anticipated Agriculture Dept. report predicted that farmers would plant 90.5 million acres of corn this year, above already inflated expectations. Last year, 78.6 million acres were planted.

After the report, May corn futures were trading at $3.74 per bushel on the Chicago Board of Trade (BOT), down 20 cents on the day but substantially higher than last year's price (for May, 2006 futures) of $2.73.

The report came as a relief for ethanol producers and especially for other industries, such as meat producers, vulnerable to high corn prices. Increasing demand for ethanol is widely credited with the price rise as the plant-based fuel becomes more integral to the U.S. gas supply.

Change in Farmer Safety Net

A less closely watched, but telling, statistic also released on Mar. 30 provided a bit of a cushion for corn prices: U.S. corn stockpiles for March were at 6.07 billion bushels, down 13% from last year.

"I think we've got enough demand out there to keep the prices stable at these levels," says Ken McCauley, a White Cloud (Kan.) corn farmer who is president of the National Corn Growers Assn. McCauley spoke from Washington, where he was in town for the release of the USDA report. On Mar. 28, he testified before a House subcommittee on agriculture on the suggested modifications to the government safety net for farmers.

Roughly speaking, in the 2002 Farm Bill, which expires with the 2007 crop year, farmers are compensated based on corn prices, which were then far below their ethanol-fueled heights. The NCGA hopes to see more of the safety net shifted to actual yield produced from an acre to protect more against crop disasters that can hurt farmers' investment.

Boon for Livestock Companies

"This is not just about protecting producers at a higher price," says Sam Willett, NCGA senior director of public policy. "The key here is to protect producers' yield risk" as farmers invest more heavily in corn.

On the stock markets, the instant beneficiaries from the corn report were major livestock concerns like pork behemoth Smithfield Foods (SFD) and poultry producers Tyson Foods (TSN) and Pilgrim's Pride (PPC) (see BusinessWeek.com, 1/10/07, "Commodities: Who Profits from Corn's Pop"). Corn is a major expense for these outfits, which need to feed animals many pounds of grain for every pound of meat they produce.

During corn prices' recent tear, meat producers murmured about raising prices in the supermarket. They tend to be much more exposed to fluctuating prices than cereal producers like Kellogg (K) because of the minimal value of the corn in a box of cereal.

Political Tensions Lifting Prices

It may be less of a problem for meat producers this year. But with improved crop technologies the average yield per acre has climbed. Assuming favorable conditions, the NCGA says there could be a corn crop of 12.7 billion bushels this year, the largest ever.

With increased corn acreage widely expected, other stocks with corn exposure didn't show massive gains in the wake of the report. Diversified ag-giant Archer Daniels Midland (ADM), the country's largest ethanol producer, was trading somewhat higher on the afternoon of Mar. 30, as were pure play outfits Pacific Ethanol (PEIX) and Aventine Renewable Energy (AVR).

Peer VeraSun Energy (VSE) dropped steeply. The industry is getting a lift from current energy-market conditions as ethanol prices tend to run parallel with the cost of oil, which is trading sharply higher on the back of British-U.S. tensions with Iran.

Cyclical Nature

Monsanto (MON), the producer of corn seeds, was flat as well in Mar. 30 trading. A note from Standard & Poor's (which, like BusinessWeek.com, is owned by The McGraw-Hill Companies [MHP]), suggested that a large crop had already been priced into the stock and kept its hold rating on the company.

Following the report, Citigroup (C) released bullish notes on ADM and Deere (DE). The broker sees a 25% upside for the shares, now trading around $109. The farm equipment manufacturer thrives when farmers feel flush and want to update or replace their aging rigs.

But farmers, of all people, should remember how cyclical demand for key crops can be. Just because ethanol is hot now doesn't guarantee continuing demand for corn.

Ethanol can be produced from a variety of sources, including sugar cane. In coming years, ethanol produced from plant waste could become an attractive—and cheaper—option. But at least for now, expect lots of eyes focused on the ears.

Halperin is a reporter for BusinessWeek.com in New York.