Through $7 bushel corn prices, millions of acres added to production in the U.S. and globally, and finally some crop friendly summer weather, farmers will have succeeded in turning tight corn stocks into burdensome stocks by fall.
They will have likely also succeeded in reducing corn prices by half or more. This will complete the circle of life for the corn market.
Low prices provide the seed corn for growing new demand. Low prices have multiple impacts on the market. They will discourage low margin acres.
They will no longer be able to get the revenue crop insurance coverage that allowed some producers to grow corn on marginal acres.
Regions like North Dakota, in particular, will have a mini-crisis given basis there. Input returns and cash rents will also have to be evaluated as to what makes sense.
Farmers can spend a lot more to grow $7 corn than corn that is worth $3.50.
Cheap corn will also have a significant impact on end-users. Ethanol production is setting records, yet the price of corn is falling like a rock in a pond. How can that be?
The ethanol industry was created because this country had a glut of corn and the farm program subsidized and perpetuated the over-production. A multi-year drought and $7 corn made everyone forget that.
End-users were spoiled with the system in place that gave them the opportunity to buy corn below the cost of production indirectly subsidizing these end-users.
They were spoiled by that and squealed like a stuck pig when they had to pay what corn was worth, blaming that on the ethanol industry.
The ethanol industry saved taxpayers money by ending most corn subsidies. If the market works like it should, low corn prices should fuel resurging demand.
Corn end-users are back in their old stomping ground able to buy corn below the cost of production again. The livestock industries will expand when they can.
They are being restrained from expansion by the high cost and in the case of the pork industry, by PEDv. Given time though, they will increase feed usage.
Exports will fluctuate, but as long as the dollar stays down so foreign buyers get the full impact of lower prices, exports will grow. A lot of foreign production is high cost so will turn off as prices no longer support it. Cheap corn is deja-vu for the ethanol industry.
Remember my “ethanol corn put?” The plan was for corn growers to diversify by investing in ethanol plants that were built to profit from low corn prices.
When corn prices were high the poor ethanol margins would pay no dividends, but none were needed. We should be going back to when ethanol investments start delivering profits to investors again.
Great Plains Renewable Energy stock has more than doubled in value this year. If it were a free market and left up to market forces, ethanol producers would expand production, increasing demand for corn while lowering fuel costs for consumers at the pump.
The Renewable Fuels Standard was meant to force the closely held petroleum industry to open market access to biofuel. Biofuel production has exceeded the RFS mandate to date, but a recent reinterpretation of the RFS by EPA occurred.
Instead of expanding market access for biofuel the EPA reduced volumetric totals on the basis of an implied E-10 blend wall.
There is no such thing as an E-10 blend wall if E-15 and blenders pumps were installed expanding market access.
The financial incentive is there to do so. More ethanol would lower fuel costs if used in larger quantities.
Yet the truth is that the petroleum industry, which controls most of the consumer market access for biofuel would not blend more ethanol even if priced at a nickel per gallon, because they are the gate keeper and would act to protect their market share.
The petroleum industry is using its collective market power to control and limit the amount of ethanol consumers can buy.
One hundred years ago, Theodore Roosevelt would have gone after this petroleum trust looking to bust it. The EPA instead appears to be in league with Big Oil.
Republicans typically tout free market principles, but they too are more in league with Big Oil contributors like the Koch brothers that fund their campaigns, so oppose ethanol.
Ethanol is not subsidized and the RFS is not a subsidy. It is a free market protection, or is supposed to be. Unfortunately, the EPA plans to use it to limit, rather than expand, market access for ethanol.
If this were a free market, more ethanol would be produced and more cheap corn would find demand from ethanol end-users. Pump prices would be lower.
Ethanol production will grow within the restraints put on access to the domestic market. The ethanol industry is frankly angry at the stupidity and hypocrisy of the politicians and regulators and so will look for markets outside the U.S. where they can find access to for ethanol.
Cheap corn will boost ethanol production, but the artificial restraints put on this market will result in lower production than a free market with unrestrained access to U.S. consumers would otherwise dictate.
David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.
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