Corn prices have fallen by its limit of $0.30/bushel today, at about $7.52/bushel, and other ag commodities are also trading down. Wheat is off more than $0.25/bushel, to around $7.17. This on the same day that Goldman Sachs said that US Department of Agriculture estimates for the US corn, wheat, and soybean harvests are not pessimistic enough. That should boost prices, not cause them to fall.

One reason for the drop in corn prices may be a US Senate vote scheduled for later today on whether or not to maintain the $0.45/gallon federal subsidy on corn-based ethanol. If the Senate rejects the subsidy, which is scheduled to end in December, about 40% of the US corn crop will lose its subsidy. It takes about 4 bushels of corn to make 10 gallons of ethanol, so the 5 billion bushels now going to ethanol production makes about 12.5 billion gallons. The subsidy is worth more than $1/bushel annually, nearly all of which is returned to corn producers.

If the subsidy is allowed to expire, large ethanol makers Archer Daniels Midland Co. (NYSE: ADM), Valero Energy Corp. (NYSE: VLO), and Great Plains Renewable Energy, Inc. (NASDAQ: GPRE) could see their share prices fall even further than they already have in the past three months. Shares of both are off more than -15% since March. Pure-play ethanol producer Pacific Ethanol, Inc. (NASDAQ: PEIXD) is down nearly -70% since March, but that company has other problems.

US ethanol production capacity now tops 14 billion gallons a year at more than 200 plants. By 2022, US law has mandated that 36 billion gallons (about 855 million barrels) of US fuel supplies come from renewable sources. Corn-based ethanol is expected to account for about 15 billion gallons (about 350 million barrels) of that total.

Another factor weighing on corn prices today is that corn is now more expensive than wheat, which encourages ranchers to switch from corn to wheat to feed livestock. Potential flooding along the Missouri River has not played much of a role in boosting prices. Finally, there is undoubtedly some profit-taking going on.

Goldman’s analysis concludes that late corn planting in the US due to the cool, wet spring weather will not see a lot of crop substitution. The bank’s commodities traders think that corn will continue to go into the ground because soybeans — the primary substitute — simply don’t return as much profit as does corn.

Goldman also notes that the crop insurance payout for lost crops due to early season weather woes is too low to keep farmers from planting late crops, which typically yield less corn per acre than do earlier plantings. Goldman also believes that even if more corn is planted late, the harvest will still fall short of USDA expectations.

If Goldman is right, and if the Senate vote does not kill the corn-ethanol subsidy, demand will get even tighter, and today’s reversal in corn prices will soon be a misty memory.

Archer Daniels Midland shares are trading up about 1% today, at $30.11, in a 52-week range of $25.02-$38.02. Valero shares are up nearly 3%, at $25.03, in a 52-week range of $15.49-$31.12. Green Plains’s shares are up more than 2%, to $10.69, in a 52-week range of $8.12-$13.64. Even Pacific Ethanol’s shares are up nearly 1.5%, to $1.48, in a 52-week range of $1.25-$8.75.

The Market Vectors Agribusiness ETF (NYSE: MOO) is up about 1%, to $52.95, in a range of $35.62-$57.93, and the PowerShares DB Agriculture Fund (NYSE: DBA) is down about 0.5%, at $32.67, in a 52-week range of $23.53-$35.58.

Overall, a reasonable conclusion would be that Goldman’s commodities desk carries more weight than the US Senate.

Paul Ausick

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