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.

Topics: ,

Leave a Reply

Management Stories

Management2016 CTIC Cover Crop Survey: 33% Report ROI From Cover Crops
July 28, 2016
Insight from 2,020 farmers from across the country reflected enthusiasm for cover crops and—for the fourth year in a row—found Read More
ManagementNew Rabobank Report Calls for Farmer ROI Focus
July 25, 2016
As U.S. row crop farmers brace themselves for a third year of negative margins, Rabobank believes farmers must lower the Read More
ManagementGROWMARK Meeting Visit, Company Takeover Updates, and RNC Invite
July 22, 2016
Editors Paul Schrimpf and Eric Sfiligoj discuss their recent speaking engagement at GROWMARK’s eastern event, crop protection company merger rumors, Read More
ManagementLand O’Lakes Announces SUSTAIN Business Unit, Other Changes
July 20, 2016
Land O’Lakes, Inc. today announced the formal organization of a new business unit, SUSTAIN, and its leadership. SUSTAIN will focus Read More
Trending Articles
Southeast Farmers Coop - Finished Building
Retail FacilitiesNew Stueve Facilities Offer Ag Retailers Speed, Accuracy
July 9, 2016
Leading the industry in planning and constructing dry fertilizer storage and chemical warehouse solutions, Stueve Construction helped three ag retailers Read More
Heritage Cooperative
Retail FacilitiesKahler Automation Designs State-Of-The-Art Facility For Heritage Cooperative
July 4, 2016
Heritage Cooperative in Marysville, OH, needed an efficient liquid, dry and grain facility to serve the many needs of their Read More
The Andersons Waterloo
ManagementFirst Indiana Facility Certified Under 4R Nutrient Stewardship Certification Program
June 27, 2016
The 4R Nutrient Stewardship Certification Program has announced that The Andersons, Inc.’s Waterloo, IN, facility has been added to its Read More
Food IT
Industry NewsCalifornia Event Will Mix Ag And Tech Professionals To Explore IT Solutions
June 20, 2016
Silicon Valley is hot on agriculture, and an upcoming event in California will bring together the food and tech industries Read More
Monsanto Luling Plant
Eric SfiligojWhat’s Next For Monsanto?
May 31, 2016
For the folks at Monsanto’s headquarters in St. Louis, MO, it has been an eventful few weeks. Back on May Read More
Soybean Plant closeup
Industry NewsMonsanto Rejects Bayer Bid; Open To More Talks
May 25, 2016
Monsanto Co, the world’s largest seed company, turned down Bayer AG’s $62 billion acquisition bid as “incomplete and financially inadequate” Read More
Latest News
FertilizerGypsum Added To List Of Conservation Practices
July 28, 2016
Crop farmers in a growing number of states may be eligible for financial assistance from the USDA’s Natural Resources Conservation Read More
Management2016 CTIC Cover Crop Survey: 33% Report ROI From Cover …
July 28, 2016
Insight from 2,020 farmers from across the country reflected enthusiasm for cover crops and—for the fourth year in a row—found Read More
Palmer pigweed seedhead in cotton
HerbicidesStudy: Fall Weed Controls Can Make Significant Impact O…
July 28, 2016
An article published in the latest issue of the journal Weed Science shows that adopting harvest-time and post-harvest weed controls Read More
InsecticidesSyngenta: Beware Of Early Stinkbug Threat To Soybeans
July 28, 2016
With the record warm temperatures this past winter and confirmations from early entomologist reports, Syngenta encourages growers to monitor stinkbug Read More
Peanut field
Crop InputsVerdesian Introduces New Inoculant For Peanuts
July 28, 2016
As planning begins for the next growing season, Verdesian Life Sciences adds Primo Power CL, a new liquid inoculant, to Read More
Soil Young Corn
Crop InputsSmithsonian: 5 Things to Know About New GMO Labeling Bi…
July 27, 2016
On July 14, the House of Representatives passed a bill requiring large food companies to label products containing genetically modified Read More
Palmer pigweed in soybean stubble
HerbicidesSpecial Issue Of Weed Science Explores Human Aspects Of…
July 27, 2016
Weeds that evolve resistance to herbicides are a serious threat to global agricultural production. In this Special Issue of Weed Science, Read More
CHS Primeland
CropLife 100CHS Businesses In Washington, Idaho Combining For Great…
July 27, 2016
As full-service ag retailers, CHS Primeland and CHS Farmers Co-op collectively serve farmers and other customers in 15 counties in Read More
Storage Tanks at Nachurs
Crop InputsNACHURS Joins Field to Market
July 27, 2016
NACHURS announced today that it has joined Field to Market: The Alliance for Sustainable Agriculture, a leading multi-stakeholder initiative working Read More
Illinois Researchers
FertilizerMeasure Of Age In Soil Nitrogen Could Help Precision Ag…
July 26, 2016
What’s good for crops is not always good for the environment. Nitrogen, a key nutrient for plants, can cause problems Read More
Kochia
Crop InputsNufarm Launches New Herbicide for Resistant Kochia
July 25, 2016
Nufarm introduces Scorch herbicide for U.S. farmers and ranchers combating a broad range of troublesome broadleaf weeds. A unique premix Read More
ManagementNew Rabobank Report Calls for Farmer ROI Focus
July 25, 2016
As U.S. row crop farmers brace themselves for a third year of negative margins, Rabobank believes farmers must lower the Read More
Syngenta Sign
Crop InputsBloomberg: Syngenta-Chem China Deal on Track for Regula…
July 25, 2016
Syngenta AG, which has agreed to be taken over by China National Chemical Corp. for $43 billion, said talks with Read More
ManagementGROWMARK Meeting Visit, Company Takeover Updates, and R…
July 22, 2016
Editors Paul Schrimpf and Eric Sfiligoj discuss their recent speaking engagement at GROWMARK’s eastern event, crop protection company merger rumors, Read More
Crop InputsMonsanto: EU Approves Roundup Ready 2 Xtend Imports
July 22, 2016
Monsanto Co. announced today that the European Commission has granted import approval for Roundup Ready 2 Xtend soybeans. This milestone Read More
Syngenta headquarters in Basel, Switzerland
Crop InputsSyngenta Announces Alfalfa Seed Split Off
July 22, 2016
On September 1, 2016, Syngenta will transfer sales and distribution of alfalfa seed to the NEXGROW branded business that is Read More
Dow DuPont
Crop InputsDuPont, Dow Shareholders Approve Merger
July 21, 2016
DuPont and The Dow Chemical Company announced that, at their respective special meetings of stockholders held today, stockholders of both Read More
ManagementLand O’Lakes Announces SUSTAIN Business Unit, Oth…
July 20, 2016
Land O’Lakes, Inc. today announced the formal organization of a new business unit, SUSTAIN, and its leadership. SUSTAIN will focus Read More