Beginning early June, heavily rainfall flooded parts of northern Iowa and southern Wisconsin at a time when the ground was still soaked from spring rains. Homes, cities and roads suffered extensive damage. Corn and soybean fields were also hit hard; their future now in serious doubt.

Already this season, farmers were behind with planting due to the wet conditions. With the additional rain and flooding in parts of Iowa, Wisconsin, Indiana and other states, corn is taking another hit. Crop conditions as reported in the USDA's weekly weather and crop bulletin released Tuesday declined, with only 57% rated as good or excellent - down from 60% the week before. The real question is what that number is going to be next week once flooding subsides and the crops can be inspected. If prices lately are any indication, the market is betting that the quality of corn from these areas will continue to decline.

Corn (C, CBOT)

Just how many corn acres are affected is anyone's guess - and nobody's guessing. Most analysts have refrained from flat out saying that the sky is falling, preferring to wait until field inspections can begin. Experts quoted in CBOT's "Commodity News for Tomorrow" newsletter dated June 18 have made back-of-the-envelope estimates of crop loss in the range of 10% to 30% for corn, and lower ranges for soybeans. The financial impact of these losses is expected to rise into the hundreds of millions of dollars.

Thus, corn futures, which weren't exactly just lollygagging about this year, continue to rise.

Even those farmers lucky enough to have avoided the worst of the flooding will likely see a rise in production costs. Excessive rainfall can cause nitrogen depletion, necessitating additional application of nitrogen just to keep yields intact. Perhaps now would be a good time to look into some nitrogen producers? Those guys have it tough too - nitrogen fertilizer production in the U.S. is already down 40 percent since the turn of the century, thanks to the high price of natural gas. Besides, the biggest bet there - CF Industries (CF) - is already up 200% in the last year. How much higher could it actually go?

Downstream Effects

Higher corn prices have ripple effects across the food (and energy) chain. Beef, hog and poultry producers are facing higher feed costs. So far there haven't been big jumps in cattle or hog futures, in part because some producers are just dumping meat onto the market before they normally would, just to avoid time at the feed lots. But as corn continues to go up, it may just be a matter of time.

Ethanol, on the other hand, is reacting much more quickly.

Ethanol (AC, CBOT)

VeraSun Energy Corp announced Monday that it will delay the opening of two new ethanol plants due to the high cost of corn. The two plants were going to add an additional 220 million gallons of capacity per year. Elsewhere in the industry, Citigroup analyst David Driscoll raised concerns in a report quoted by the Financial Times, that small-to-midsize ethanol plants across the country may close due to high corn prices. He estimates that could result in a decrease of 2 billion to 5 billion gallons of ethanol capacity in the coming months.

More immediately, the flood is having a direct effect on operational ethanol plants. On Friday, the Iowa Renewable Fuels Association prepared a report on the status of Iowa's ethanol and biofuel industry after the floods. Their conclusion? "IRFA estimates that over 300 million gallons (annualized) of ethanol production is currently off-line." Since Iowa produced roughly 2.1 billion gallons in 2007, that means about 14% of their capacity is sitting idle.

Finally, damage from the flood and dangerous water conditions have temporarily closed parts of the Mississippi River to commercial traffic. Barges transport grain down river, and coal and fertilizer up river. Without this Twainian highway, companies have to find alternate routes to transport their goods. Unfortunately, many railway and road bridges have been damaged or are closed for inspection. Time to look at Huck Finn's raft again.

Lower production, not surprisingly, is leading to higher costs: ethanol futures have jumped 50 cents a gallon on the CBOE in the past month, as producers react to higher input prices by cutting production.

It's easy in ags to relax once the weather clears up. But this time, it's gonna hurt all year long.

In Midwest Floods, a Threat to Crops, New York Times, June 17, 2008

Ethanol Industry Statistics, Renewable Fuels Association

How the floods will hurt the economy, CNNMoney.com June 17, 2008