Saturday, January 13, 2007

Corn, ethanol, and 2007

OK, enough silliness with While it is easy to rip apart our Boy Governor and 80's pop bands, it is another thing to tackle a major issue facing Iowa farmers - 2007's crop and its potential prices driven by a demand for ethanol.

Yesterday, here in The South of Iowa, we were blessed to have both Elwynn Taylor, ISU's climatologist, and Bob Wisner, ag economist, also from Iowa State, at a crop fair held at the Baptist church education building. As the snow was falling ever so gently, both men unwrapped their predictions for Iowa for the coming year.

Mr. Taylor, the elder meteorologist with the voice of a soothing grandfather, told us that we are destined to have a drought in the next 4 years. Our last drought year, 1988, is only 19 years ago. Major droughts have occurred at least once every 19 to 23 years, and if this does happen, we'd break 800 years of records (tree rings are used to determine this).

So, are we headed for a drought? We've never had a drought during an El Nino period, and we are going away from El Nino and headed to La Nina, which has produced many droughts. While we are blessed with a great amount of subsoil moisture at this time, we did as well in 1988 - it caused us to plant our crop too late, and they suffered under the hot and dry conditions of August. So, I'm going to visit my crop insurance agent on Monday and up my coverage - I can pay for it with the higher crop prices that we're seeing, I hope. Then I'm going to hedge with options on the CBOT when they become inexpensive enough.

Bob Wisner explained the demand for corn for ethanol production. He said that if all of Iowa's ethanol plants planned, expanded, and under construction come on line in 2008, they will use 133% of Iowa's 2006 production. That is, it will use all of the corn we produced and more, not leaving any for animal feed or export. That is a big, big demand. If 2006 acreage was the same as 2008, that would mean we'd have to produce 356 bu/ac...our state average this year was 166 bu/ac. Maybe if we had a state full of Francis Childs we could do this, but not for us mere mortals.

Mr. Wisner explained that this probably will not occur; some plants will not be built, but there will still be a big demand for corn if, and this is a big if, corn prices are still acceptable to ethanol plants and crude oil prices remain above $50/barrel or so.

Here's where the train wreck can happen:

Corn was up limit on the CBOT on Friday at 20 cents/bu, as was soybeans at 40 cents/bu. Corn delivered out of the field locally is priced at nearly $3.50/bu. While we as farmers will gladly take it now, I can see the following happen:

1) In December 2007 through March 2008, crude oil will fall or has fallen below $45/barrel. Ethanol plants have locked in this $3.50+ corn, and are now running in the red. New plants forego breaking ground. The expected demand for ethanol doesn't develop, and the bottom falls out of the corn market faster than Boy Governor taking off for Krispy Kreme.

2) Now that the market has dropped off and these plants are dipping into their equity, ADM/Cargill/et al come in to "rescue" these plants by buying them for 10 cents on the dollar.

3) The ethanol production is now consolidated under 2, maybe 3 large corporations. Corn goes back to $2.00/bu, but cash rents and inputs stay up. Farmers are back in the same ol' ____.

Or, maybe we'll have a drought in 2007 or 2008 and really throw everything into a tizzy. Meat prices will go through the roof, not before many hog producers are put out of business because of high feed prices.

While I love these high prices for corn and soybeans, it does bring further implications: Higher cash rents and land values, greater volatility at the CBOT, and the old saying "what goes up must come down". Things will equalize at some point; we are NOT at a new plateau in agriculture, just at a blip. The big boys will see to it that we don't profit too greatly from this demand, and something will happen to bring it all back down. It has happened before, and it will happen again. The smart thing is to prepare yourself against this foreknown information and do what is best for your operation. Zig when everyone is zagging.


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