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

StewardshipOhio Water Quality Project To Determine How Much Phosphorus Is Leaving Fields
July 27, 2015
Researchers with the College of Food, Agricultural, and Environmental Sciences at The Ohio State University are looking for farmers in Read More
ManagementFCI Trade Summit Update & Precision Tank Turns 50
July 23, 2015
Editors Dave Frabotta and Eric Sfiligoj discuss the upcoming FCI Trade Summit in Las Vegas, NV, and how Precision Tank Read More
ManagementUpdates On UAV Rules & Crop Conditions
July 16, 2015
CropLife’s Paul Schrimpf and Eric Sfiligoj provide updates on the ongoing UAV regulations debate and how the nation’s crops are Read More
StewardshipOhio Farmers Improving Water Quality Through Fertilizer Applicator Training
July 15, 2015
Since last fall, 6,586 growers and producers responsible for farming some 1 million acres of Buckeye State farmland have gone Read More
Top 100 Articles
CropLife 100Pinnacle Purchases California-Based Specialty Crops Retailer
July 20, 2015
Pinnacle Agriculture Holdings has successfully acquired California-based NH3 Service Co.  Operating as part of Pinnacle’s Performance Agriculture brand, the new locations Read More
Asmus Farm Supply liquid fertilizer facility features 20,000 square feet
CropLife 100Slideshow: Asmus Farm Supply Shows Off Its New Liquid Fertilizer Facility
July 15, 2015
Asmus Farm Supply, Rake, IA, recently added a new liquid fertilizer facility to its company operations. The new liquid fertilizer Read More
CropLife 100Wilbur-Ellis Feed Division Facilities Receive Safe Feed/Safe Food Certification
July 13, 2015
Wilbur-Ellis Co.’s Feed Division, a marketer and distributor of value-added feed ingredients for the aquaculture, livestock and pet food industries Read More
CropLife 100BRANDT Expands To Brazil With Acquisition
July 8, 2015
BRANDT has acquired a majority interest in Target Brasil Fertilizantes Ltda. through its Brazilian subsidiary. Target Brasil manufactures, distributes and Read More
Milan Kucerak, president/CEO, West Central
CropLife 100West Central Cooperative And Its New President Are A Match Made In Deviation
June 29, 2015
To appreciate just how unique West Central Cooperative is in the world of ag retail, an observer need only consider Read More
Winter Wheat
CropLife 100South Dakota Co-op Member Owners Vote No On Unification
June 26, 2015
The Boards of Directors for North Central Farmers Elevator (NCFE) and Wheat Growers (WG) have announced that member-owners have voted Read More
Latest News
StewardshipOhio Water Quality Project To Determine How Much Phosph…
July 27, 2015
Researchers with the College of Food, Agricultural, and Environmental Sciences at The Ohio State University are looking for farmers in Read More
FertilizerKoch Agronomic Services Launches N-TEGRATION Technology
July 27, 2015
Koch Agronomic Services, LLC (KAS) has launched  N-TEGRATION Technology, a process technology platform designed to enable production of enhanced efficiency fertilizers at Read More
HerbicidesExpert: IARC Herbicide Classifications Leading To Confu…
July 24, 2015
Few people in the crop protection industry had heard of the International Agency for Research on Cancer (IARC) before this Read More
ManagementFCI Trade Summit Update & Precision Tank Turns 50
July 23, 2015
Editors Dave Frabotta and Eric Sfiligoj discuss the upcoming FCI Trade Summit in Las Vegas, NV, and how Precision Tank Read More
Palmer pigweed seedhead in cotton
HerbicidesUSDA Deregulates Dow AgroSciences’ Enlist Cotton Trait
July 23, 2015
The USDA today issued its decision deregulating Dow AgroSciences’ Enlist cotton trait in the U.S. The USDA has now completed its Read More
Industry NewsVerdesian Life Sciences Showcases Versatile Product Por…
July 23, 2015
Technology has revolutionized agriculture by bringing farmers, retailers and distributors to the forefront of the digital age. To meet the Read More
FertilizerWSJ: Cf Industries Exploring Merger With Dutch Chemical…
July 23, 2015
U.S. fertilizer maker CF Industries is in advanced merger talks with Amsterdam-listed chemical company OCI NV, the Wall Street Journal Read More
HerbicidesNufarm Releases New Panther SC Herbicide
July 23, 2015
Nufarm has announced the availability of new Panther SC herbicide. Panther SC is the first liquid formulation of flumioxazin available Read More
EquipmentFarmLink Launches Farm Equipment Sharing Program
July 23, 2015
FarmLink has introduced a new online farm equipment sharing community – MachineryLink Sharing – leveraging this new economy business model Read More
HerbicidesCould The South’s Most Troublesome Weed Represent A Thr…
July 22, 2015
Palmer amaranth is undoubtedly the most troublesome weed in the southern United States, taking a devastating toll on both cotton Read More
Industry NewsH.J. Baker Hires New Director Of International Sales
July 22, 2015
Global Agriculture firm H.J. Baker announced today that Steve Langley has joined the company’s Crop Performance Division and Animal Health Read More
InsecticidesSyngenta Recommends Soybean Scouting To Prevent Economi…
July 22, 2015
Proper soybean insect pest control begins with scouting. As the warm weather continues, Syngenta encourages growers to implement a scouting Read More
Crop InputsH.J. Baker Launches Fall Sulphur Campaign
July 22, 2015
H.J. Baker has launched their “Keep Your Future Green – Use Tiger This Fall and Win Big” campaign. The campaign Read More
Central Valley Ag Randolph, NE
Retail FacilitiesStueve Construction Builds Fifth Facility For Central V…
July 21, 2015
Central Valley Ag partnered with Stueve Construction Co. to successfully design and build its Monroe, Oakland, Wakefield and Royal hub facilities Read More
FertilizerNew Research Could Lead To Less Reliance On Nitrogen, E…
July 21, 2015
Farmers often are required to apply nitrogen fertilizers to their crops to maintain quality and improve yields. Worldwide, farmers used Read More
Seed/BiotechMonsanto Targets Farmers, AFBF In Syngenta Takeover
July 21, 2015
As Monsanto Co. struggles to convince rival Syngenta AG to discuss a potential merger, the seed and agrochemical giant is Read More
CHS Building exterior
Retail FacilitiesSackett Helps CHS Expand Blending Facility, Improve Acc…
July 21, 2015
CHS needed a blend plant that could vastly expand their capabilities in St. Charles, MN. The A.J. Sackett & Sons Read More
Industry NewsH.J. Baker Adds To HR Team
July 21, 2015
H.J. Baker announced today that Barbara Sullivan has joined the company’s executive team as Vice President of Human Resources. Prior Read More