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High energy prices have taken another casualty, following Dow Chemical’s Tuesday announcement that it would be upping prices and idling its production. On Wednesday, VeraSun Energy said that though it had completed construction on an ethanol plant that could produce 110 million gallons per year, it would be delaying the opening of the plant indefinitely. This is the third ethanol plant of this capacity that the company has delayed in recent times.

Given the sky-high demand for ethanol, it may be surprising that VeraSun would limit its production ability, but not all think so. Piper Jaffary, in a note to clients, wrote that the delays were a “smart move” by the company.

“While the closing reduces near-term revenue and earnings, VeraSun has, in our view, correctly realized that the supply of ethanol must remain tight to insure ethanol prices stay above $2.80 per gallon.”

At this price, it said, the company can “tread water” at about 3 cents per gallon operating profit until the ethanol-corn “crush margin” was more favorable.

Corn prices are anything but favorable these days, after having risen about 65% since April, largely on flooding in the Midwest, where major crops are grown. In a June 19 note, BB&T Capital Markets wrote that the flooding was “wreaking havoc on people’s lives as well as the commodity markets.”

Noting VeraSun’s decision to delay plant openings, BB&T said it expected delays or cancellations to continue “as sustained cost relief is not foreseeable at this some and some producers may not want to bring facilities on line as that would trigger interest payments on construction in progress financing.”

Politicians love to talk about the rosy future of ethanol. The question is: is it just a pipe dream? With corn prices surging to above $6 a bushel, the ethanol industry has become a victim of its own success.

Shares of many ethanol producers have tumbled sharply this year. Aventine Renewable Energy’s stock has plummeted 66% since the beginning of the year and has been off 82% since the end of 2006. VeraSun Energy Corp. and Pacific Ethanol Inc. both lost about half of their share values year-to-date. BioFuel Energy Corp. has declined 35%, while Xethanol Corp. is down 35% on the year.

The sector took another beating Friday after UBS analyst Chris Shaw lowered his price target on Aventine and VeraSun, saying that $6 corn and $10 natural gas will cause continued deterioration of margins for ethanol producers. The impact of every 10 cents increase in corn equates to a 3 cents to 4 cents per gallon increase in the cost of producing ethanol, Shaw said.

Broadpoint Capital analyst Ron Oster echoed the view, saying that weak ethanol margins “will persist” as higher revenues are offset by increased feedstock costs.

Indeed, the declining margin issue in the ethanol sector has become so severe that Goldman Sachs analyst Arjun Murti wrote in a note on April 8, “In our 16 years of covering mostly traditional energy companies, we have never observed a sector so intent on building new capacity irrespective of the current margin environment or resulting balance sheet strain.” At no time can we recall any of the traditional energy sectors “aggressively spending to the point of financial peril during a period of weakness,” Murti argued.

There’s little sign things will get better soon. The sharply higher corn prices as a result of higher demand under the expanded Renewable Fuels Standard passed into law last December will keep ethanol crush spreads weak (crush spread refers to the difference between the value of the ethanol produced from a bushel of corn and the cost of the corn), Murti said. So in other words, while higher crude oil prices may result in higher ethanol prices, higher revenue will likely be offset by higher feedstock costs.

“Ironically, the increased RFS and resulting upward pressure on agricultural commodity markets means that over the next several years, there is likely no oil price at which ethanol economics will look attractive,” Murti said. “It is really not a question of whether we need $120 per barrel or $150 per barrel oil prices for ethanol economics to become attractive. So long as corn markets are tight, we suspect that a higher oil price would merely drive corn prices higher—bushel and barrel convergence is here.”

The only plausible explanation for the “build-no-matter-what-the-consequence” mentality in the ethanol group, Murti said, is some presumption that the government will take actions to ensure the viability of the industry. However, while recent developments in the financial services industry might lead some to believe that a lender of last resort could come to the rescue, “we think that planning on a bailout is not a prudent course of action.”

In 2007 American farmers planted an astonishing 93.6 million acres of corn - just shy of the 1944 record of 95.5 million acres - more than what they planned in early March of that year. With “ethanol” making its way into the mainstream lexicon, the rush was on to plant as much corn as the crop market would bear.

When the latest Department of Agriculture farmer planting survey is released before the market opens Monday, expect a reaction in stocks, no matter what the numbers say.

Describing the survey results as closely watched is an understatement. The volume of corn to be planted has implications for fertilizer demand, ethanol producers, cereal makers and by extension, even farm equipment makers such as Deere & Co.

The corn acreage number will be “critical,” said Citigroup’s David Driscoll, “as the market continues to measure whether the nation can continue to produce enough corn to satisfy both food and fuel demand.” He estimates prospective plantings of 87 million acres (the consensus) or more, which would be neutral for ethanol and food producers. Anything near 85 million acres or less would drive up corn prices, potentially denting ethanol and food stocks.

The official USDA forecast in February predicted 90 million acres of corn, but the consensus has fallen since then.

UBS analysts are forecasting a figure closer to 85 million acres. “Given the significant investor activity in the ag sector and the current historically high prices of ag commodities, we would expect larger than normal interest in the acreage forecasts,” analysts there wrote in Friday research note. “If overall acreage for all the major crops disappoints, there could be a rally in all he commodities, as demand expectations have remained high.”

An across-the-board agricultural commodity rally could boost agricultural-related stocks such as Monsanto, which recently boosted its profit outlook on its seed business, DuPont and fertilizer producers.

The USDA release will also list the expected plantings as of March 1 for corn, wheat, oats, soybeans and other crops.

Profits in the chicken industry are as bad as they have ever been, and the culprit seems to be ethanol.

Pilgrim’s Pride Corp., the Pittsburg, Texas-based producer of prepared and fresh chicken and Turkey, said Wednesday that it will close a chicken-processing complex and six of its 13 distribution centers to curtail losses in the face of an oversupply of chicken and record-high costs for corn, soybean meal and other feed ingredients. Pilgrim’s said the closures, which will result in the loss of 1,100 jobs, are “in response to the crisis facing the U.S. chicken industry from soaring feed-ingredient costs resulting from corn-based ethanol production.”

The boom in the ethanol business and the increased use of corn in ethanol production, along with growing demand for food, have sent prices of corn, grain, wheat and many other food commodities soaring, hurting profits in the meat and poultry industry. Based on current commodity futures markets, Pilgrim’s said the total costs for corn and soybean meal to feed its flocks in fiscal 2008 would be more than $1.3 billion higher than what they were two years ago.

“Our company and industry are struggling to cope with unprecedented increases in feed-ingredient costs this year due largely to the U.S. government’s ill-advised policy of providing generous federal subsidies to corn-based ethanol blenders,” said Pilgrim’s chief executive Clint Rivers. “The cost burden is already enormous, and it’s growing even larger.”

The announcement from Pilgrim’s is a clear positive for the chicken industry afflicted by excess protein and soaring feed costs, analysts say. “We would assume other companies may also follow,” said JPMorgan analyst Pablo Zuanic. “So more than thinking in terms of absolute (how big are the cuts), we see today’s news as an inflection point.” Zuanic said he expects combined cutbacks of about 3% by the industry by the summer. And based on last year’s reaction in chicken prices following production cutbacks announced by Tyson Foods and Pilgrim’s, Zuanic estimates average revenue per pound for the industry could increase by about 12-15 cents from current levels.

The whole chicken producing sector got a boost Wednesday. Shares of Pilgrim’s Pride rose as much as 6.3% in intraday trading, rival Sanderson Farms Inc. rallied 14%, while Tyson Foods Inc. gained 4.3%. Merrill Lynch’s Diane Geissler sees the announcement from Pilgrim’s as a “clever” way to announce a production cut. “By not quantifying how much production will be removed from its system, Pilgrim’s Pride can keep its competitors (mainly the small, fragmented players) guessing as to production levels.”

And for Credit Suisse analyst Robert Moskow, the announcement is “a political statement more than anything.” It puts job losses “on the shoulders of misguided public policy on biofuels expansion,” Moskow wrote. But will additional job losses persuade legislators to reverse course on ethanol subsidies or the 15 billion gallon ethanol goal by 2012 that passed into law?

“It will be hard,” he said.