Not too long ago, newly built ethanol plants helped local cash prices spike above futures prices, says Del Bratland, a corn grower near Willow Lake, SD. Although not likely to occur again this year, he's hoping that market conditions will change soon to bring about more aggressive bidding among grain buyers, whether for ethanol or other uses.

“The ethanol plants, when they first started coming out, were bidding for corn among local farmers to outbid the elevators, which narrowed the basis,” explains Bratland. He is an investor in two of the three ethanol plants located nearby. “Before the last two corn crops, we actually had a negative basis — we had a plus basis for a short time for corn in our area.”

However, those days seem long gone this year, he adds. “The ethanol plants still work with the farmers to get bids, but they're not bidding as aggressively, because everyone has corn right now,” says Bratland. “We've had really good corn crops here for the last two years and haven't shipped much of it out. Without the ethanol plants, I don't know where the basis would be.”

U.S. ethanol plants have nearly doubled in number during the last four years, and they may double in number again this decade. According to the Renewable Fuels Association (RFA), 61 ethanol plants were in operation in January 2002, 95 were in operation in January 2006 and 33 are currently under construction. Yet, even with the higher demand for ethanol, corn markets have recently stagnated.

“Basis levels are as low as they've been in five years,” points out Kevin McNew, president of Cash Grain Bids Inc., a Montana-based marketing intelligence firm. “We look for things to improve with this fall's 2006 crop. But that doesn't help farmers trying to market their grain right now.”

Why a weak basis for corn this year, despite more ethanol plants to choose from? “First and foremost, we have a lot of corn,” says McNew. “Things have really changed after two record corn harvests.”

Unsold corn compounds the problem, says Kent Thiesse, Vice President, MinnStar Bank, Lake Crystal, MN. “A lot of the 2005 and 2006 corn is still un-priced,” he points out. “As long as there is a lot of corn sitting un-priced in on-farm or grain elevator storage, that will keep the basis wide and the local prices much lower than the Chicago Board of Trade prices.”

Ethanol plant managers are simply being smart when they lock in their cost of production, explains Thiesse. “The biggest cost in ethanol production is the cost of the corn,” he says. “When ethanol plants can lock in inputs at a low cost, they will, to help their bottom line. The basis is extremely wide right now — so they're taking advantage of it. Many have locked in their corn supplies for the rest of the year. Now they are bidding for '06 corn to use for '07 ethanol production.”

McNew agrees. “About 30% of the ethanol plants in the Upper Midwest have already bought all the corn they need for 2006,” he says. “So there is no stimulus in prices, because they've already locked up their supply.”

Plant managers won't bid the price of corn any higher than the market necessitates, says Thiesse. “When the first ethanol plants came out, you had to be a shareholder to deliver grain,” he says. “The newer ethanol plants are open to anyone. They may work with elevators to make sure they have enough storage available to keep them going on a daily basis, but most ethanol plants are still bidding higher than the local elevator.”

Bloated transportation costs are also weakening the basis price for corn. “Higher transportation costs are really driving down the basis in the countryside,” says McNew. “Both barge and rail rates have skyrocketed during the last two years. For example, the cost to ship corn by barge from Beardstown, IL, to the Gulfwas 20¢/bu. in 2004, whereas it costs 50¢/bu. today.”

Farmers hoping for a better basis price this fall or next spring will likely be disappointed. “Unless we have some crop problems that reduce corn production in 2006, we are not likely to see the dramatic rise in corn prices that some are predicting for a while,” says Thiesse.

However, with many more ethanol plants coming online next year, the extra demand for corn could help to improve prices, notes McNew. “We basically have about 30 more ethanol plants under construction right now that could chew up 700 million more bushels than last year,” he says. “That's a sizeable chunk. If we don't have a big price increase this year, next year will be the big test. If farmers don't get the right signals to plant more corn next spring, we may quickly use it all up in the ethanol market.”