Thursday, March 12, 2009

Consider it solid...

My multiple reservations not withstanding, we are building our business model around ethanol on our farm.  Sadly, our livestock sector needs to face this likelihood as well.

The US will be about corn, and corn will be about ethanol.

Not, however, because of the reasons most often used: energy security, environmental benefits, economic competitiveness with alternatives.
For many environmental advocates, of course, these discussions are of secondary importance; what matters most is that green jobs will help the planet. They'd be wise to be careful there, too. Indeed, the most successful green jobs program to date is one that no environmentalist wants to brag about: the conversion to corn-based ethanol. A recent United Nations report estimated that the heavily subsidized U.S. ethanol industry provides employment for 154,000 Americans, about five times as many as the wind power industry and nearly 10 times as many as the solar industry. That goes a long way to explaining why, despite mounting evidence showing that corn ethanol is a failure (some would say a disaster) on the environmental front, U.S. policy appears to be on cruise control. At its base, corn ethanol is not a green policy so much as a jobs policy—and its success in that respect has made it almost impossible for the government to change course. [More]
Now factor in the ease with which this program seems to navigate against the river of logic against it.  It is a political marvel requiring essentially no budget exposure for the government by virtue of mandated use.  The path of least resistance is to keep raising the mandate and let the cost be borne by consumers obscurely.

I think it is poor policy for our nation and world, but betting against it has been a foolish choice for any farmer.  And right now the employment angle is an overwhelming virtue - even if it is economically unsustainable labor use requiring market manipulation.

11 comments:

Anonymous said...

John , in building your farm business model around ethanoldoes that mean that I (the livestock industry) your biggest customer should give up?? we just can't seem to get consumers or packers too pay more for meats or dairy so I am at a loss too how we can compete with subsidized ethanol,,unless gov't just ends up mailing all of us a check every month.
We have made a decision of no more owned barns,,will hire or pay for custom feeding and accumulate more cash crop ground to someday exit this crazy business...regards-kevin

Anonymous said...

John thanks for bringing up the greatest divide in Agriculture since the introduction of the barb wire fence!!
Dirt farmers and cattle men are really getting ready for our own OK Corral.
As a dairyman I think there at least needs to be truthful evidence put forward as to the real benefits of DDG'S.
THe only problem I can see is that all these employees will have cheap energy for thier cars but expensive energy for thier own stomachs. so what will be more important food or fuel?
By the way I am voting with my pocketbook already I WILL NOT BURN ETHANOL in my wifes Suburban or use BIO DIESEL in my pickup.
JR Burdick dairyman Bio Fuels hater.

Anonymous said...

I have pondered this aspect for a few weeks now. Many comments I have heard is corn prices will be decent because the ethanol mandate requires so many bushels used. However, with so many ethanol producers either shutting down production or at least scaling back currently, how can we meet the mandate?

This scenario reinformces my view that livestock are the #1 customer, have been the customer when no one else was there, and will be the customer corn producers need to focus on.

John Phipps said...

kevin:

What Aaron and I are looking at is for corn to be the most profitable and reliable crop looking outward. Hence more bins, trucks, cash rent, etc.

I cannot say what the response in the livestock sector could or should be. The big dairy and hog operators seem to be hanging tough. The key will be how fast the economy recovers and if exports can continue.

Meats have to rise in price - no doubt about it. I think we see beef consumption drop with lesser declines in pork and poultry.

anon3:

The shakeout in the ethanol industry will end when (if) the mandate is raised as investors will return I think. We'll see how the Verasun sale goes. The smaller plants will be in stronger hands with vastly reduced fixed costs.

Blenders will have to buy the ethanol, so the price will rise to keep enough plants running, even if gas stays low. Remember we've been overproducing the mandate until now, so demand dropped as soon as gasoline prices did.

I have always believed the single-mindedness of the corn industry was a mistake. We have placed our best customer in a brutal situation without looking back. They deserved better from us.

That said, I am amazed how feeble the lobbying response has been from the livestock industry. I'd think they would have more clout with western senators that has been evident to date.

Anonymous said...

I am baffled by grainfarmers ardent support for ethanol despite the facts. I an equally baffled by livestock farmers over dependence on grain and their simultaneous failure to plan for high grain prices. There are major flaws with both of these business models. The best don't do what everyone else is doing; they do what needs to be done.

JR said...

John I was thinking of your post some more while feeding cows this morning. You made the comment about lobiest being quite when it comes to this effort. I have an idea as to why this is.
AGE OF Farmers. For the most part the age of the average livestock farmer is younger than the average cash cropper.
most cash croppers are retired livestock guys they worked hard and now they are thinking when I quit going to the barn I still want to raise crops so they don't want to "shoot themselves in the foot". Cause we all know that young people aren't coming back so lets wory about us. Also most lobiests believe the global warming hype and therefore being agasint ethanol is being for global warming. Just some thoughts from this dairyman. JR

Anonymous said...

Back in the 70;s there was a farm in Washington state that had a spoiled crop of wheat. They hooked up with a equiptment seller and made alchol from the crop then ran it thru an internal combustion engine to a generator and sold the power produced to the utility at the "highest avoided cost" under the auspices of the PURPA Act. The result was that they made a net profit of 120 thousand on the year and fed the mash back to their livestock on the farm before storing the balance of the mash as dried brewers grains.
The PURPA Act is still in force, and the market for electricity is infinite. The mash is the best livestock feed i know of and it can be piped if you want. There should be no hesitation to use this opportunity to combine the subsidy and the power market for full gain.
The increase in food prices is market manipulation by the grocery industry. There is only 3 cents worth of wheat in a loaf of bread so triple the price of the wheat and add 9 cents to the $1.99 retail per loaf and see if the world starves to death overnight. Not likely to happen. Market manipulation? Gauranteed to be with us till the end of time.

poorfarmersgirl said...

Ok just had to comment. My husband and I raise cattle and hogs we are small. We grow beans and corn as well and do not sell what we need. We bale our own hay and buy when we have to as well. Come on not all us farmers are looking in only one direction but the ones people listen to are so hence the argument, dirt farmer or cattle man.
When it comes to biodiesel and ethanol, it is the price I look at sometimes it is higher others it is lower. Do I buy into the globel warming thing not sure but fossil fuel will run out ethanol at least is able to be replenished and as pointed out the byproduct still feeds cows and pigs.
The argument of one or the other hits me as dumb people need to look at the whole picture not just part of it and decide.
What happened to commonsense? There are two sides to every story start listening then find what is in the middle. We don't need to be extremist here we need to all work together so all can benifit. Stop corparations from monopolizing the food industry and the little farmers will flourish.

Anonymous said...

Dear Sir,

Comment on how we are positioning our operation.
1. Lots of continuous corn production.
2. Off farm diversification
3. We are very slowly diversifying into livestock again.

We quit raising hogs in 1994 and quit feeding cattle in 2001 when I started my off farm adventure. In fall of 2004 we purchased 6 head of purebred show heifers that we also thought were capable of being very good cows. As I have stated before don't know if I am raising cattle or kids, but herd has 27 cows in it now.

We have focused on growing our females and have only sold 3 bred heifers, 2 bulls, three open heifers and lots of steers. We also have still purchased heifers and last year 2 cows that were bred and had calves at their side. We have purchased 22 show heifers in 5 years and have sold two of them we believed would not make good cows. We have 10 possible good quality show heifers around here now that all may or may not make it into our breeding herd. Could be 37 cows next year.

Large investment, at least by my cheap standards, large new combine in all, cattle and equipment, and buildings, but we are using some old buildings and equipment from previous livestock ventures. Kids really do love it. They are getting work experiences and life experiences that you cannot duplicate anywhere (your comment on livestock judges and objectivity, life and death issues, etc.).

So where am I going on farm outlook with this.

1. If we ever stop killing the cow herd and people want to eat high quality beef I am in a little position to benefit from this. Dairy industry must also get their act together and downsize herd.

2. Costs as much to feed a high quality one as a low quality one. We hope to sell bred heifers and a few bulls and show steers (we mainly show heifers) when the cattle cycle turns around. Hopefully a few commercial herds left in Illinois to do that with.

3. If farm policy changes and you get paid on grass/hay/"working lands" rotations, we can capture some of that if we want to. CRP will still be around, but with the NRA support for the program and budget deficits, and perceived high food prices not sure if it will ever go much higher in acres, maybe lower.

side note: wife not a fan of government involvement, she grew up in a small town and makes me look liberal in some of my opinions.

4. If kids all leave the farm in 10 years and do not come back we have a liquidation sale of livestock and related equipment and cash in on cash grain when I am just starting to look at 60.

5. If they all love it and we can make a go of it livestock lets us do more on the acres myself and my family own. We still can chase the cash rent thing, but we will have other options.

6. other side benefits
60 acres need no dry fertilizer (stalk field cows and hauled manure)
approximately 60 plus acres back in hay and rotational pasture that can be continuous cropped and should be in better shape in ten years
If enviros take over (forced ag production methods - besides no-till, unless vegans) I am ahead of the curve for now.

7. One last thing livestock benefited from lots of years of cheap corn policy(many years cheaper to buy it than grow it).

That is probably over for maybe another 6 to 7 years.

I do follow Jim Rogers and believe in his 18 year stock/commodity cycle. He has been right for quite awhile now.

John Phipps said...

anon #6:

Re: market manipulation. This is tricky territory. My sense is markets are becoming more transparent, not less and people like you reading blogs like this is one reason. We have more ways to find out more information than ever.

Falling back on the excuse "it's all run by a big eastern syndicate" or some similar nearly paranoid world view may be morally comforting, but not competitive.

The guys I know who are moving forward don't hide behind those assumptions. In fact, the more chances I have to see what the people at "The Top" are like, the more astounded I am how they are like me. Only with cooler cars.

Ordinary people like Madoff simply take advantage of sloppy decision-making and (sadly) long-standing trust to screw others. It does not require a secretive cabal of wealth and influence.

Plus as we now know, they are equally capable of being dumber than a box of rocks and bamboozled by technology or mathematical mysticism.

Maybe there is a handful of people who control our destiny by market manipulation, but that group seems to be changing every few days.

John Phipps said...

anon #7 (Geez, guys - make up a name, will ya?):

I am not a business planning expert. I only spout off opinions. That said, my advice is free and worth every cent.

Some random thoughts about your comments.

a. You have obviously risen to look ahead, and I am utterly convinced even if you are wrong that exercise will enable you to anticpate and correct course much faster than those who refuse to lift their eyes to a farther horizon.

b. I fed cattle for my father until about 1980, so my working knowledge of the livestock industry is negligible.

c. I suggest curbing your contempt for "enviros". Not necessarily because they have political power, but because they are more like you than you may suspect. Because they disagree with you or eat goofy food does not make them folks you couldn't have a great time with. Your efforts to anticipate changes on environmental regulation are well-founded, IMHO, and the sign of a competitor looking long-term.

d. Don't rule out any decisions by you offspring. I'm not the only father to be astounded by a child returning after many years. No matter how thoughtfully you prepare they will mess up your master plan.

e. Please don't call me "sir". I automatically salute.

f. Point taken on the cheap corn provided by LDPs to the livestock industry.

g. Jim Rogers may be right. But he is also a consummate salesman, and a miserable author.

h. Thanks for a great comment.