Ethanol Debate and Farm Profits - Sunday, 17 November 2013

The EPA ethanol mandate is currently being reevaluated and debated by both sides of the issue.  In the 2005 Energy Bill a mandate was made that said we needed to produce 4 billion gallons of ethanol to blend with gasoline by 2006 and since then ethanol production has increased significantly.  The current administration revised that number a few years ago, ramping up production to 36 billion gallons each year by 2023.  Over the last few years though weather has interfered and trend line yields have not always been met which brought much higher grain prices and also the debate of “food versus fuel”. 

Opponents to the current ethanol mandate argue that the current mandate encourages producers to overproduce causing damage to our water supplies.  Run-off from farm fields is blamed for water contamination that has caused a “dead zone” just beyond the mouth of the Mississippi in the Gulf of Mexico.  The dead zone is an area where algae blooms flourish but creates an environment where no life can survive; this area is estimated to now be 5,800 square miles in size.  The Obama administration has proposed that the current mandate be reduced by 3 billion gallons for 2014.

Proponents of ethanol maintain that we have produced plenty of corn to go around to satisfy all end-users this year.  There is also a misconception that corn used for ethanol production is ONLY used for that purpose while in reality 17 pounds of every bushel of corn used for ethanol gets turned into feed. 

South America’s weather appears to be improving.  Argentina estimates that 25% of the soybeans have now been planted and the area has been receiving regular rainfall as well.  Brazil reports that they are now 70% planted and conditions are favorable in most areas other than southern Brazil where it is slightly dry.  A very large soybean crop has been planted in South America and reports are that China has begun to book their soybean needs for 2014 from that origin.  This could make soybean prices more volatile into next year, margins are sure to get tighter if news of a big crop continues to emerge.

The past year has been difficult for long-only Index Funds, they have taken a beating, and because of that several have moved their investments to the robust stock market. Speculators have become fundamentally important in the grain markets, right now we have record short positions in corn and big long positions in soybeans and with the year-end quickly approaching what will investors do?  There is normally a reduction in volume at this time of year and upcoming USDA reports are anxiously awaited and are certain to have a sizable impact on prices going into the New Year.

    

As farm profits go down the worry of debt resurfaces again.  A recent study was done to look at farmers’ debt levels to see how the numbers compare after having a few lucrative years, the study shows that average debt levels today are similar to those of 1979.  In 1979 the percentage of debt/asset ratios of 40% or higher was at 19.4%, in 2012 this amount was 14.4%.  2012 ranks as the third best farm income year out of the last 40 years, 1973-74 came in first.  The study is not predicting a repeat of the 1980’s farm crisis but there are noticeable similarities.  One important difference today compared to the ‘80’s is interest rates, although when “real” interest rates (adjusted for inflation) are compared, 2012 came in higher at 3.6% then the 2.4% found during the 1980’s.  The study goes on to say that a repeat of the Farm Crisis is not likely at this point because it would require a combination of a 65% increase in interest rates and a 15.7% decrease in the value of production.  One other important concern is the fact that IF the farm bill gets approved AND direct payments are excluded, it will contain less of a safety net than the farm bill of the 1980’s.  We do have the safeguard of revenue based crop insurance but two good crop production years could offer little protection.

CROP INSURANCE

With the harvest price out, we expect there to be many revenue claims on corn.  Check with your agent if you are not sure if you will have a claim.  Please try to have all notices of loss in by December 1st so we can send them in on time.  Please work on turning in your production totals as soon as possible also.

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