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RFA Responds to Flooding Event, High Prices

June 17, 2008
By: Julianne Johnston, Pro Farmer Digital Managing Editor
 
 

Responding to the flooding events over the course of the past week, Renewable Fuels Association President Bob Dinneen issued the following statement:

“The floods in the Midwest are adding yet another layer of worry for millions of Americans already trying to cope with record high oil and gasoline prices. While it is far too early to fully assess the impact of the flooding, it is clear that this unprecedented event will likely cause already high grain prices to remain elevated, further putting strain on industries that rely on corn and other crops. The ethanol industry is no exception. However, last year’s record corn crop and this year’s anticipated increases in worldwide grain production should help all users of corn to withstand these unprecedented conditions.

“Knee-jerk reactions to this unprecedented weather event would do even more harm to the nation against the backdrop of the current oil and economic crises it faces. Abandoning our commitment to ethanol and biofuels, as some would suggest we do, would do nothing to provide meaningful relief from high grain prices today or in the future. It would absolutely force the price of gas through the roof and require the import of more record-high foreign oil.”

As is always the case during natural disasters, context is important. The following are key facts to consider when analyzing the potential impacts of the flooding:

ETHANOL MARKET:

  • Many recent news articles have speculated that flooding will lead to higher ethanol prices, and in turn, higher gasoline prices. This assumption is based on the notion that flooding will lead to sharply higher corn prices and reduced ethanol output. The historical correlation between corn prices and ethanol prices is very weak.
  • Even if ethanol prices do reach sustained higher prices, we expect that ethanol will continue to have a moderating impact on gasoline prices. This is because wholesale gasoline is priced 60 to 90 cents per gallon higher than ethanol in most markets. Even if ethanol prices increased 20% in the short-term (which seems unlikely), ethanol would still be priced considerably below gasoline.
  • According to the Energy Information Administration, ethanol stocks totaled 11.4 million barrels at the end of March. This means nearly 500 million gallons of ethanol are in storage and available to gasoline blenders.
     
  • Just a fraction of total ethanol production capacity has been impacted by the flooding. The only known impacts are occurring in Iowa where the Iowa Renewable Fuels Association estimates up to 400 million gallons of production capacity could be temporarily of line. That means more than 95% of all ethanol production capacity is unaffected by flooding.
     

CORN AND GRAIN MARKET:

  • Corn farmers harvested a record crop of 13.1 billion bushels in 2007, which boosted corn supplies available for use in 2008. More than 1.4 billion bushels of corn-equivalent to 11% of the corn used for all purposes last year—were “carried in” to this year. This carry-in will help ensure grain is available to corn users in the event of a short crop in 2008.
     
  • Grain markets are global by nature. Reduced grain production in the United States is likely to be offset by increases in production in other parts of the world. Total global grain production (coarse grains, wheat and rice) is projected to be 2.3% higher in 2008 than in 2007. The EU, former Soviet Union, and Australia are among the regions that are significantly increasing grain production this year. Of the expected global supply of grain, ethanol demand represents just 3%.
     
  • Iowa Farm Bureau estimates 1.3 million acres of corn will be lost in Iowa. Coupled with expected losses in other states like Illinois, Wisconsin, and Missouri, total corn acre losses could register in the range of 2 to 3 million acres. Farm Futures Magazine estimates that up to 3.3 million acres of corn may be lost to rain and flooding, based on a recent poll of 600 farmers. This means 2008 corn plantings are likely to be in the 83 to 84 million acre range. USDA’s June 30 Acreage Report is expected to reflect corn acre losses due to weather.
     

HISTORICAL CONTEXT: 1993 FLOODS

  • In 1993, wide-spread flooding occurred in both the Missouri River and Mississippi River Basins. This year, flooding in the Missouri River Basin is limited.
     
  • Farmers responded to market conditions in 1994 with 8% more corn acres, a new record yield of 138.6 and the first-ever 10 billion bushel crop.
     

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RELATED TOPICS: Weather, Policy, Energy

 
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