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Biofuels Will Not Solve 2014 Grain Glut

Stocks in this article: SZYM KIOR ADM

NEW YORK ( TheStreet) -- As we noted Wednesday, falling grain prices are hitting the farm belt hard and it’s difficult to find many winners in the carnage.   

The last time we had a glut like this one there was a major correction in stock prices -- but correlation is not causation.

Two things happened to end the last glut. First, there was an expansion in the use of biofuels, mostly ethanol made from corn, from 880,000 barrels per day in July, 2011 to 963,000 barrels per day by the end of the year.

Read MoreFalling Grain Prices Shift Landscape for Restaurants, Processors

Current production is at the upper end of that band -- 931,000 barrels per day in the Aug. 8 report -- but consumption continues to be well below targets set in 2007 and the gap is expected to increase, mainly because demand for gasoline is actually going down thanks to new efficiency standards. Production is now approaching the "blend wall," where 10% of U.S. gasoline is ethanol.

The price of corn futures, meanwhile has continued to deteriorate and has now gapped-down to 2011 levels.

The situation is not much better in the rest of the grain complex. Wheat prices are approaching levels last seen in 2010, and soybean futures are now also headed down.

The U.S. Department of Agriculture is not yet ready to call this a bumper crop. Grain traders are skeptical of the USDA estimates however, according to AgWeb, believing they may be too low.

Some traders express hope that an early frost and slow-maturing crops could cut production from current estimates, but those are hopes.

The last grain glut was accompanied by enormous optimism among biofuel makers. That’s not true this time. The hottest biofuel start-up on the market, Solazyme (SZYM), is now trading near one-year lows and the once-promising Khosla-backed cellulosic fuel start-up, KiOr (KIOR), may go bankrupt as early as next month. KiOR is trying to produce fuel from pine pellets at a plant in Mississippi.

What caused prices to go up after 2011 was something you wouldn’t wish on anyone, a drought across Russia, Australia and the U.S., which cut production and sent prices climbing.

Farmers have limited control over prices, but they are doing all they can. The use of plastic "silo bags," marketed here under names like Flexi-Grain, is increasing. Flexi-Grain systems can keep grain safe on a farm for several months, but even that utility has a limit.

There are some winners here. Grain processor Archer Daniels Midland (ADM) is now trading at an all-time high of over $50/share. It reported net earnings of $533 million, 81 cents per common share, on revenue of $21.5 billion for the quarter ending in June. Factories treating grain as an input can still make money in this environment, but it seems few other players can.

Read MoreCramer: It's a Putin Windfall

At the time of publication the author owned no shares in companies mentioned in this article.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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