Floods, fuel push US corn to record price

Corn prices are appaching a record $8 a bushel on spot trading markets, which means meat and processed foods are likely to get more expensive.

Why is corn so high? Two reasons, says Charlie Rentschler, Iowa farmer [Boenning says he's not really: 7/11] and agribusiness analyst for Boenning & Scattergood in West Conshohocken:

1) "The ethanol industry consumers about 40% of the US corn crop" and has, by itself, forced a doubling in corn prices since 2006 (he cites data from Capital IQ and the University of Missouri that shows corn prices rising with ethanol prices and use);

2) "Nature has made a mess out of the Midwest" this Spring: Steady rain that's flooded rivers has kept farmers from planting. "As of yesterday, only 13 percent of the US corn crop was planted," vs 40% by this time, on average, in the past ten years.

Even planted corn "is standing in water and rotting and will have to be replanted." More rain is on the way, he told me in a call this morning.

$10 a bushel corn is possible, Rentschler concludes. But it may not last long:

It's not that Congress has the will to reverse subsidies to big grain farmers and protection restrictions against Brazilian ethanol and other alternative fuels. .(Rentschler says Brazilians are actually importing cheap US ethanol instead of refining their own from sugar, which is fetching high prices.)

It's that US ethanol refiners face crushing competition that is making the business barely profitable, Rentschler reports.

With Archer Daniels Midland opening two giant new plants, one of them fueled by coal, small producers who distill as much as a quarter of US grain alcohol could be forced to close in the next few months. Rentschler says that could bring corn prices plunging as low as $5 a bushel, freeing up more US corn for export to Indonesia, Japan, and even protectionist China.

It's a Joseph Schumpeter "creative destruction" moment, Rentschler says: "This house-cleaning needs to be done."