"The Green Option," -Part 3
Thursday, September 14, 2006SUSIE GHARIB: This week, the Agriculture Department predicted this year`s corn harvest should be the second best on record, despite a drought in some areas. This year, a bigger portion of that crop than ever before will be used to make the gasoline additive ethanol. That`s giving corn prices a boost. But as Midwest bureau chief Diane Eastabrook explains in part three of "The Green Option," using corn for ethanol means it can`t be used for other things.
DIANE EASTABROOK, NIGHTLY BUSINESS REPORT CORRESPONDENT: Farmer Carl Neubauer wades through what promises to be a bumper crop of corn.
CARL NEUBAUER, FARMER: We`ve got a lot of ears in the field, which you know bodes well for yield.
EASTABROOK: Neaubauer farms 1,200 acres of land in central Illinois. In the past he has planted half corn, half soybeans, but not this year. Corn is taking up two-thirds of Neubaurer`s acreage. The reason: a number of new Midwest ethanol plants means more buyers and potentially better prices for corn.
NEUBAUER: We`ve got about 4.5 billion gallons of capacity in the U.S. now. We`ve got plants coming online in the next year or so that will up that about another two to 2.5 billion gallons. So that has been a big driver especially in central Illinois for corn.
EASTABROOK: In the nation`s corn belt, ethanol could be an elixir to years of sagging grain prices and government price supports. American farmers are expected to harvest a little more than 11 billion bushels of corn this fall. That is similar to what they harvested last year. But this year about 30 percent more corn will be used to make ethanol than last year.
The ethanol effect has been reverberating through the Chicago Board of Trade`s corn pits all summer. Grain traders say ethanol is modestly impacting the price of corn, adding perhaps $0.20 to its $2 a bushel cost. But ethanol is having an even bigger impact on futures prices. Traders say anticipated production hikes are building huge premiums into futures contracts that expire next year.
VICTOR LESPINASSE, CORN TRADER, A.G. EDWARDS: If ethanol demand keeps growing the way it has been over the last couple of years and the way it is projected to grow over the next coming years, we are going to see $4 or $5 corn certainly, especially if we have any weather problems here in the Midwest.
EASTABROOK: But not everyone is profiting from higher corn prices. John Kellogg raises more than 30,000 hogs on his family farm in northern Illinois. His animals eat about 300,000 bushels of corn a year. So higher feed prices eat away at his profit margins.
JOHN KELLOGG, HOG FARMER: Each $0.10 that corn goes up it adds about a dollar to the cost to raise a pig. So, it might raise the cost of producing a pig $15 to $20.
EASTABROOK: Kellogg predicts heftier feed costs will drive many livestock farmers out of business, and in turn drive up meat prices. And agriculture economist Dan Basse fears meat won`t be the only thing getting more expensive at the grocery store, thanks to ethanol.
DAN BASSE, PRESIDENT, AGRESOURCE: If we also plant more corn acres in the years forthcoming -- five million acres next year as needed, 10 million the year after -- it`s going to have an impact on fewer acres of wheat, fewer acres of cotton, fewer acres of oil seeds and as such, all of this just leads to higher food prices as we look two or three years in advance.
EASTABROOK: Energy analyst Howard Simons warns if there is a weather crisis like a drought, the most basic supply and demand equation could be upset.
HOWARD SIMONS, ENERGY ANALYST, BIANCO RESEARCH: Who gets the corn? And are we going to allow ourselves to be subject in the food market to what is happening at the energy market?
EASTABROOK: For farmers, ethanol means yet another market for their corn crop and potentially higher prices in the long run. And some farmers like Neubauer think that could eventuality wean them from government subsidies. And for the U.S., turning corn into fuel could mean becoming a more energy efficient and independent nation. Diane Eastabrook, NIGHTLY BUSINESS REPORT, Shirley, Illinois.
