Ethanol production would fall if corn prices were to reach and stay above $10 a bushel, justifying the U.S. Agriculture Department’s estimates, Morgan Stanley said.
The department today reduced its forecast for corn used for ethanol by 8.2 percent to 4.5 billion bushels from a July estimate, because of record corn prices caused by the worst U.S. drought since the Eisenhower administration.
“The USDA’s 400 million-bushel month-over-month cut to ethanol demand is surprisingly large, however, and we contend that ethanol demand rationing of that magnitude will need sustained corn prices above $10 a bushel,” Morgan Stanley analysts including Hussein Allidina and Bennett Meier wrote in an e-mailed report today.
Denatured ethanol for September delivery fell 0.1 cent to $2.625 a gallon at 12:16 p.m. on the Chicago Board of Trade. Prices have gained 19 percent this year.
Corn for December delivery sank 7 cents, or 0.9 percent, to $8.1675 a bushel. Prices yesterday rose to a record $8.2375. One bushel makes at least 2.75 gallons of ethanol.
About 42 percent of the corn crop will be used for biofuel production.
Ethanol production has fallen 15 percent to 817,000 barrels a day in the week ended Aug. 3 from a record in December. Stockpiles sank 3.9 percent to 18.7 million barrels last week, the biggest decline since Dec. 9 and the lowest level since Jan. 6, Energy Department data show.
Yesterday, East Kansas Agri-Energy LLC, an ethanol producer, said it plans to stop output at its Garnett, Kansas, plant on Oct. 1, because drought in the Midwest has made the operation unprofitable.
Valero Energy Corp., the third-biggest U.S. ethanol producer, is operating its plants at about 50 percent of capacity because of the higher corn prices, Chairman and Chief Executive Officer Bill Klesse said July 31.