U.S. Agriculture: Challenging Times Ahead

Having spent a lot of time analyzing U.S. agriculture and prognosticating on what will happen next, my bottom line assessment is that the heady returns of the last few years are probably over, but the fears of the most pessimistic among us are probably overblown as well. Simply put, Midwest American agriculture is likely entering the early stages of a cyclical correction.

Note that I reference the Midwest because the biggest boom (bubble?) has been in row crop agriculture in the Heartland (especially corn and soybeans), largely as a result of the ethanol boom.

Drivers Of The Ethanol Boom

Ethanol is at the core of the situation in which American agriculture finds itself today. Many people have asked me what drove this ethanol boom. In my view it was a unique combination of both private and public support to both supply and demand for ethanol:

  1. The U.S. government supported ethanol demand through RFS, blender subsidies, the phase-out of MTBE in gasoline and R&D support for ethanol research.
  2. The U.S. government further supported domestic supply of ethanol through tax credits on biofuel facility construction and imported ethanol tariffs.
  3. Private industry supported the demand for ethanol through the expansion of hybrid and flex-fuel vehicle fleets as well as the overall growth of the greentech investment industry.
  4. The supply side of ethanol was supported by the ag industry (which had a large supply of cheap corn) due to both productivity (GMO corn) and favorable weather. The private equity and banking sectors supported supply through large quantities of cheap credit.

The net effect of this public and private support to ethanol was a surge that resulted in some 200 ethanol plants operating in the U.S. consuming 30% to 40% of the corn crop.

As a result of the ethanol boom, the price of corn jumped from the average price of $2.37 over the 35-year span from 1970 to 2005 to a much higher range between $4 and $7.50 a bushel, about two to three times the historical average. I have heard ethanol supporters claim that ethanol has had no effect on corn (or food) prices. My only question is: What are you smoking? Of course ethanol has raised corn prices! A primary reason corn ethanol is so strongly supported by corn growers (and many others in agriculture) is precisely because it has had the effect of creating a solid demand (price) floor under the commodity.

We all know in agriculture that commodity prices are set by the marginal demand in the market. The ethanol boom created demand for 5 billion bushels of corn, most of which was met with new production. This demand for corn not only drove corn prices to new heights, but also raised the entire commodity crop complex (which after all has to compete with corn demand to get acres). I find it somewhat amazing that anyone could argue with a straight face that adding 40% incremental demand to a commodity crop would not affect the price. Anyone who could seriously advance this argument clearly flunked Economics 101.

By the way, I am not saying that higher corn demand and higher corn prices are bad for American agriculture. In fact, I think they are good for American farmers and American agriculture. Higher prices not only support farm income but also support the investments in emerging technologies that are crucial to increasing agricultural productivity to meet the burgeoning demands of feeding 9 billion people by 2050 without massive subsidies. Corn prices of $2/bushel would simply not support this investment. But we need to quit arguing that ethanol has had no impact on the price of corn or food — that is patently false and just embarrassing. Instead, let’s embrace that enhancing the profitability and productivity of agriculture is essential to building the capacity to feed the world in the future.

Oil Arbitrage

One unintended consequence of the ethanol boom is that we have created an arbitrage situation with oil. Since crude oil is converted into gasoline and ethanol derived from corn is a substitute for gasoline, resulting in a direct correlation between oil and corn prices. This helps agriculture when oil prices are high, but when oil prices decline (global recessions, fracked natural gas competition) it can put downward pressure on ag prices.

The Effect Of Monetary Policy

Another related effect is that of monetary policy. The U.S. government has been printing money at the rate of $85 billion per month for the past few years and has been using monetary policy to lower the relative value of the dollar, which supported higher commodity prices. With the focus on “tapering” all the talk in Washington right now, it’s possible we could see a stronger dollar, which could have a negative impact on commodity prices.

Pages: 1 2

Topics: ,

Leave a Reply

Management Stories

StewardshipMichigan Agriculture Leaders On Toledo Water Ban: We Want To Be Part Of The Conversation
August 8, 2014
Leaders of Michigan agricultural organizations said Thursday that the government should not have a “knee-jerk reaction” based on last weekend’s water ban in Toledo due to fertilizer run-off in Lake Erie. Read More
ManagementRussia Bans U.S. And EU Ag Product Imports In Ukraine Sanctions Battle
August 7, 2014
Russian President Vladimir Putin has banned the import of agricultural goods from countries that have imposed sanctions on Russia. Read More
EmployeesAsmark Institute Dedicates New Training Center To Ford West
August 6, 2014
The Asmark Institute plans to recognize the retired industry leader's years of service to the fertilizer industry at the new state-of-the-art facility in Owensboro, KY. Read More
LegislationUSDA: Quick Implementation Of Disaster Assistance Programs A ‘Top Priority’
July 9, 2014
USDA has processed 106,000 payments to farmers in 40 states across the country who suffered livestock and grazing losses between Oct. 2011 and passage of the 2014 Farm Bill. Read More

Trending Articles

FertilizerFall Fertility 2014: Forecasting Fertilizer Use
September 7, 2014
Great crops this year have tapped the soil, and fall work is definitely called for, but how challenging will that get? Read More
CropLife 100CHS To Build $3 Billion Fertilizer Plant In North Dakota
September 5, 2014
The fertilizer plant in Spiritwood will be the single largest investment in CHS history, as well as the single largest private investment project ever undertaken in North Dakota. Read More
EquipmentNew Holland Acquires Miller-St. Nazianz
September 3, 2014
The assets of Miller acquired as part of the transaction will become part of New Holland Agriculture, a CNH Industrial brand, building on a successful four-year partnership between the two companies. Read More
CropLife 100Pinnacle Acquires East Kansas Chemical
September 2, 2014
Ranked 82nd on the CropLife 100, East Kansas Chemical will operate as part of Pinnacle's Performance Agriculture brand. Read More
MAGIE 2014 ShowStopper
EquipmentJohn Deere Again Wins MAGIE ShowStopper Award
August 25, 2014
For the second consecutive year, John Deere was honored at the Midwest AG Industries Exposition (MAGIE) for its new R4045 sprayer. Read More
ManagementExpert To Discuss Farmland Value, Rent At Farm Science Review
August 18, 2014
While cropland values in Ohio increased in the past two years, they have remained flat in 2014, declining in some cases, according to an Ohio State University agricultural economist. Read More

Latest News

Equipment2014 Product Of The Year Voting
September 19, 2014
Many new products were introduced to the ag retail marketplace this year. From this group, CropLife IRON and its consulting partners have selected five finalists for the Product of the Year award. Please cast your vote today to help us determine the winner. Read More
Equipment2014 Farm Science Review Crowd Tops 2013 Show
September 19, 2014
The 52nd annual Ohio State University Farm Science Review welcomed more than 130,000 farmers, industry professionals, FFA students and agricultural enthusiasts during the three-day event. Read More
Seed/BiotechUSDA Approves Enlist Following Rigorous Review
September 18, 2014
Dow AgroSciences now awaits EPA registration of Enlist Duo herbicide, the companion herbicide to the Enlist traits, which is expected in the near future. Read More
BlendersYargus Appoints New Plant Manager
September 18, 2014
Steve Shaffer will direct and coordinate daily operations at the company’s Marshall, IL, manufacturing plant, where the Layco line of material handling equipment is produced. Read More
CropLife 100Pinnacle Acquires Kansas-Based Cedar Ridge Supply
September 16, 2014
Cedar Ridge Supply will operate as part of Pinnacle's Performance Agriculture brand. Read More
StewardshipSecretary Vilsack Highlights Innovative Conservation Ef…
September 15, 2014
Nearly $16 million in Conservation Innovation Grants (CIGs) will be awarded to 47 organizations to help develop cutting-edge ideas to accelerate innovation in private lands conservation. Read More
Seed/BiotechSyngenta Responds To Cargill Lawsuit
September 15, 2014
Syngenta believes that the lawsuit is without merit and strongly upholds the right of growers to have access to approved new technologies. Read More
Equipment2014 Farm Science Review Launches Mobile App
September 15, 2014
Smartphone and tablet users planning on attending the 2014 Farm Science Review can now download this year’s customized mobile application. Read More
CropLife 100Southern States Coop Grower Sets Georgia Soybean Yield …
September 15, 2014
Georgia farmer Randy Dowdy's soybeans yielded an astonishing 110.66 bushels per acre, crushing the previous record of 82 bushels-per-acre. Read More
NIMITZ Treated vs Untreated pepper plant
InsecticidesNIMITZ Nematicide Approved By EPA
September 12, 2014
NIMITZ is a novel, non-fumigant nematicide with simplified application features, user safety and an active ingredient with a unique mode of action. Read More
InsecticidesMarrone Bio Innovations Receives Patent For Chromobacte…
September 11, 2014
The patent is the first step for MBI in developing a commercially viable product to inhibit infestations of corn rootworm larvae across America and other regions. Read More
HerbicidesDow AgroSciences: Keeping The Pipeline Stocked
September 11, 2014
Dow AgroSciences is embracing product diversity to drive the company’s future. Read More
CropLife 100CHS Is Official Partner Of New St. Paul Ballpark
September 10, 2014
The new ballpark in St. Paul, MN, officially became CHS Field with Twin Cities-based CHS Inc. revealed as the naming rights partner. Read More
EquipmentHagie Honors Farming Stewardship Leaders
September 10, 2014
The Iowa Farm Environmental Leader award recognizes Iowa farmers as environmental leaders that are committed to healthy soils and improved water quality. Read More
Precision AgPlantBeat: Your Plants’ Pulse In The Palm Of Your Han…
September 10, 2014
A new agronomic monitoring and recommendation service from Phytech could rewrite the book on real-time plant health status monitoring. Read More
StewardshipCCAs Making Headway With 4R Program In Lake Erie Wester…
September 9, 2014
Certified Crop Advisers are implementing the 4R Nutrient Stewardship Certification program in Lake Erie's Western Basin to improve water quality. Read More
MicronutrientsMicronutrients Going Macro
September 9, 2014
Between 2014’s fantastic growing conditions and a heightened awareness on plant nutrition, the major players in micronutrients are gearing up for another big year. Read More
Crop InputsFMC Announces Cheminova Takeover
September 8, 2014
FMC Corporation today announced that it has signed a definitive agreement to acquire Cheminova, a wholly owned subsidiary of Auriga Industries. Read More