ETHANOL:

USDA predicts smallest corn crop in 6 years

In a report closely watched by the livestock and ethanol industries, the Agriculture Department today sharply reduced its projections of this year's corn crop in response to the drought conditions in the Midwest.

Average corn yields per acre are expected to be 123.4 bushels, down 22.6 bushels from the forecast last month and the lowest average yield since 1995. USDA also reduced its forecast for total corn production for the 2012-2013 growing year by 2 billion bushels. The crop is expected to be only 10.8 billion bushels -- the lowest figure since 2006.

The report is the first monthly projection this year to include data from the field, rather than predictions based solely on models and calculations.

While the report contains few surprises -- analysts and corn growers have predicted lower forecasts amid a searing drought in the Midwest -- it is likely to fuel the growing war of words between the livestock and ethanol industries over whether corn ethanol has exacerbated drought conditions.

Already, the ethanol industry has responded with analysis that put a positive spin on the lower projections.

"While this year's harvest will be considerably smaller than initially expected," said Geoff Cooper, vice president for research and analysis at the Renewable Fuels Association, "it is remarkable that farmers are still expected to produce the eighth-largest corn crop on record despite experiencing the worst drought in 50 years and the hottest month of July in recorded history."

"We will have enough corn," said Tom Buis, CEO of ethanol trade group Growth Energy.

The corn industry also urged a "calm, rational perspective" about the report.

"As it always has, the market will correct and continue to effectively allocate the corn supply for our various customers," National Corn Growers Association President Garry Niemeyer said in a statement.

Despite that, USDA projected that all users of corn -- including the food, feed and ethanol industries -- will have to ration demand. Corn supply used for ethanol production, currently about 5 billion bushels, is expected to be down 400 million bushels. The amount, according to Cooper, implies 12.6 billion gallons of ethanol production between Sept. 1, 2012, and Aug. 31, 2013.

Corn for feed and residual use is expected to be down 725 million bushels. Corn imports are expected to only partially offset the reductions. USDA also lowered its projections of ending corn stocks to 650 million bushels, the lowest since the 1995-1996 season.

Average season prices are expected to continue soaring to between $7.50 and $8.90 a bushel -- up from the $4.50-to-$6.40 range that USDA predicted last month.

Critics of ethanol are likely to use the report to call on U.S. EPA to waive the federal corn ethanol requirements in the renewable fuel standard.

"There's no room in our energy future for a fuel that is so easily crippled by bad weather and has such a drastic effect on global food prices," Michal Rosenoer, biofuels policy campaigner with Friends of the Earth, said in a statement today. "These yields outlined in the USDA report mean heartbreak and hard times for farmers and for the millions of people who will end up paying higher food prices this year."

Last month, a group of livestock industries formally petitioned EPA to waive the mandate, which requires that oil refiners blend 13.2 billion gallons of corn ethanol in the nation's fuel supply this year. Ethanol, they said, has contributed to the high corn prices by taking up demand for the squeezed corn supply (Greenwire, July 30).

More than 150 House members, along with about 30 senators, have also written to EPA Administrator Lisa Jackson requesting the waiver.

However, Scott Irwin, an agricultural economist at the University of Illinois, Urbana-Champaign, who analyzes ethanol and corn, said that today's projections signal that the Obama administration could be leaning toward rejecting a waiver.

The drop in corn use for ethanol production of 400 million bushels is more optimistic than Irwin said he would have expected, given the large reductions in overall yield.

"That tells me that A, they're not forecasting a waiver of the mandate," Irwin said, "or if there is a waiver of the mandate, they don't believe it will have much impact. Otherwise you would forecast ... much smaller ethanol use."

Speaking at a conference today held by the American Coalition for Ethanol in Omaha, Neb., Agriculture Secretary Tom Vilsack reiterated his support for the ethanol industry, noting that the corn crop was still historically large and that the market would sort itself out.

"This is an industry that is worth supporting," Vilsack said, "which is why the president is supporting the renewable fuel standard, and it's why I'm supporting the renewable fuel standard."

But calls for a waiver continue to grow. In an opinion piece yesterday in the Financial Times, José Graziano da Silva, director-general of the U.N. Food and Agriculture Organization, called for action on the U.S. biofuels mandate to prevent a global food crisis.

"An immediate, temporary suspension of that mandate would give some respite to the market and allow more of the crop to be channeled towards food and feed uses," Graziano da Silva wrote.

The governors of Delaware and Maryland also yesterday joined the chorus, penning a letter to Jackson asking for relief for their livestock industries that depend on corn for animal feed.

According to the Clean Air Act, only governors and obligated parties such as oil refiners are allowed to formally petition for a waiver. The letter from Govs. Jack Markell (D) of Delaware and Martin O'Malley (D) of Maryland appears to be the first such petition, alleging severe economic impacts caused by the ethanol mandate.

"Given the likely impacts to the poultry industry, not to mention the increased cost of food for consumers, of this dramatic increase in price due to the undersupply of corn," Markell and O'Malley wrote, "it is hard to imagine any scenario when exercising your authority would be more appropriate."