Thursday, June 26, 2008

It's a duck...

After a while, some arguments are resolved by unfolding evidence that rides rough over all disputed nuance.

It just quacked. It just waddled.

Houston, we have a duck probem.

Deep in the heart of every corn grower, we really really knew we were pushing the system to its limits. Only we thought the limit was the giddy heights of maybe (giggle) $5. [See also: oodles of tear-stained 08 fall delivery contracts for $4.25 or less]. But even those of us who lived through 1980 or 1983 staunchly avoided imagining that type of weather-driven scenario.
“The whole corn crop boils down to what Iowa and Illinois will do…. If you have any problem with those two states, the market will explode…It’s going to take extraordinary circumstances to get through this year without major interruptions in corn production… We’ve got a mess on our hands,” added Al Dutcher, a state climatologist for the University of Nebraska, in response to questions about the possible impacts of the excess water weather disturbances. [More]
Combined with demand absolutely NOBODY predicted, you can't write a story about corn today without alluding to a "Perfect Storm". We're going to get tired of that lede in hurry.

One reason for the wrenching aftermath looming from this year's production problems could be the corn industry pattern of carefully slicing and aligning data to offer a perspective that was at odds with the larger picture. While hog producers can't sleep, corn farmers prate on about cornflakes, where all of maybe 22 bushels are used annually.

Here in SD, it seems every other slide at the National Sunflower Association meeting referred to the battle to remain competitive with ever-more lucrative corn for acres. When food processors like Frito-Lay announced a total switch to healthier sunflower oil, the industry was ecstatic only to discover they could not revise contracts upwards fast enough to entice growers.

The result: I was told this morning to read the Fritos bag now. It says "sunflower OR corn oil". I suppose corn growers could see this as a win-win, but it belies their studied overlooking of the effects high corn prices have on other commodities due to a fixed land base. This rather obvious part of the economic analysis has been pointed out by other observers, but the duck everyone else saw is now swimming in our own cornfield, so to speak.

I am encouraged by the comments by NCGA President Ron Litterer indicating at least the possibility of recognition of a problem, but that was two weeks ago and things have gone downhill. In the meantime, the scent of blood is in the water for ethanol subsidization critics.
Citigroup's Driscoll slapped sell rating on ethanol producers BioFuel and VeraSun. He said that surging corn prices will hurt profits at both companies. Corn is the major raw material used to make ethanol, and prices for the grain have surged to record highs lately.

In addition, the analyst speculated that the rally in corn prices will force some small and midsized ethanol producers to shut down production at plants over the next few months. At least five ethanol plants have been shut down as costs to run the plants are far outweighing profits, according to Driscoll. He didn't name the plants in his report. [More]
I think this may be overstated logic, but I wouldn't buy ethanol stock right now either. The point is we skated very close to our production edge and it looks like we may wreak serious havoc on our livestock industry, and for the first time it appears even oil prices cannot protect the ethanol industry completely from red ink.

This is the problem of seizing control of a market by government fiat . Certainly it was not the intention of corn farmers to literally starve our oldest and best customers, but without a free market to allocate a now scarce resource by millions of individual decisions, this act of hubris will leave ashes in our mouths even as we cash really big grain checks.

6 comments:

Anonymous said...

John,
If Iran gets the bomb, they will use it. If Israel takes out their facilities before then, well, either way we will be squezing road kill just to try to get some oil. We might be grateful for a little ethanol by then.

John Phipps said...

anon:

The young lamb feeder I spoke with who is losing his business due to corn prices will find it hard to take solace in that thought, I think.

I agree that $8 gas will make $7 ethanol possible and hence $14 corn. What it will not make possible is 6B bushels of feed usage.

How do you plan to replace that?

Anonymous said...

John,
I am a small cash grain producer and a livestock producer. I am not personally responsible for the floods in Iowa, the exploding demand for all commodities from China and India, the price of crude oil, or even the national ethanol policies. Sometimes we have to live in the world we find ourselves in. I am sorry about the young lamb feeder, but he may just have to sit it out for awhile just as some cattle feeders did in the livestock crash of the 70's, and even as some of the ethanol plants are starting to do now. Let's not forget the droughts, the ag crisis of the 80's, or the floods of the 90's, but remember what our forefathers went through to settle here when they came with a horse, a cow, and a wagon. The market will sort this thing out eventually. You know the old saying-if you find yourself in a hole, the first thing to do is to stop digging.

John Phipps said...

Anon:

What do you do when your supplier is digging the hole for you? This market is rigged.

And euphemisms like "sit it out" tend to understate the process of ending a business. Ag operations tend to be like water skiing - you don't drop the rope and then pick it up when convenient.

If cash rents get too high, could corn growers just sit it out for a while? Not in my area.

Please see my post today from another grain customer perspective.

Anonymous said...

John,
You make some good points. But I wonder if Monsanto etal will lower their prices just to keep us in business if they can make more money selling overseas in part because of our low dollar? Did John Deere apologize to you for the price of the new combine that you bought?
I agree with you, cutting back for awhile may be difficult, but easier for a livestock producer to scale back in the intermediate than it is for a crop farmer to stop production on an asset(land)that is less liquid than livestock. We as crop producrers may have to target (and trim) our inputs better as you have written before, but also may have to consider more outside the box things like legumes for part of our N needs. Times are changing for sure.

John Phipps said...

Anon:

Your defense is well calculated. We all have issues, and have to do the best we can.

But my point is nobody rigged my market for grain against me.

Please read the post tomorrow from a hog producer and tell if if "scaling back" really covers what we have done to fellow farmers.