Corn Prices, Ethanol Subsidies and the Farmland Bubble

Here is an interesting chart illustrating the correlationship between corn prices and corn used in ethanol (also in feed).

The Bloomberg writes,

The portion of this year’s U.S. corn crop going to ethanol may surpass the amount used in feed for the first time. Federal subsidies for ethanol production, due to expire at the end of 2011, have spurred corn demand and pushed up prices, to the dismay of livestock farmers

The chart reveals that rising corn prices have accompanied the expansive growth of corn bushels used as ethanol. In short, usage of corn as food have been diverted to energy.

The question is if this correlation constitutes causation or merely a coincidence.

According to a study, the answer has partly been yes; subsidies to the ethanol industry has been generating additional demand for corn, which consequently has been influencing corn prices.

From the AFP,

US ethanol subsidies pushed up corn prices as much as 17 percent in 2011, according to a study released Wednesday at a time when Washington's policies on biofuels are coming under heightened scrutiny.

The study by Bruce Babcock of Iowa State University and released by the Geneva-based International Centre for Trade and Sustainable Development, suggests that high gasoline prices this year may have intensified demand for ethanol, creating a tighter market for maize than in previous years.

To see how relevant this relationship has been. Corn prices recently tumbled. Apparently, the collapse has been coincidental or timed with the elimination of subsidies for the ethanol industry.

According to the Reuters last June 16^th,

The Senate voted overwhelmingly on Thursday to eliminate billions of dollars in support for the U.S. ethanol industry, sending a strong message that the era of big taxpayer support for biofuels is ending.

The 73-27 vote may ultimately be symbolic since the White House has vowed not to repeal ethanol subsidies fully and the bill the repeal language is attached to is not expected to make it into law. But it underscores the growing desperation to find savings in a budget crisis that is forcing both sides of the aisle to consider sacrificing once-sacred government programs.

In my view, this shows that the answer has also partly been a yes. Subsidies have had significant distortive effects on the balance of corn economics which has been reflected on prices.

Although the White House is expected to veto the Senate bill, the corn market probably interprets that these subsidies may not last (subject to the winner of the Presidential elections of 2012).

The recent spate of interventions in the commodity markets may have also influenced the downdraft.

Aside, other factors could also be in play: the Fed’s monetary policies, global monetary policies, global supply and demand balance, (lesser) degree of globalization of agriculture trade among many other variables involved.

The side effect of levitated corn prices from ethanol subsidies has been contributing to a boom in US farmland

According to Douglas French at the Mises.org,

today's Big Ag boom is sponsored by ethanol subsidies from the state. Just as when the federal government told farmers during WWI to grow wheat to win the war, Congress voted to double production of corn-based ethanol "to win Al Gore's war" — and so a third of the US corn crop could be dedicated to making fuel, up from 7 percent in 2001.

David Peligal at Grant's Interest Rate Observer says that if the ethanol subsidy were removed, the price of corn would collapse. Senator Tom Coburn, a Republican from Oklahoma, has put forth just such a bipartisan proposal to end the 45-cent federal tax credit for every gallon of ethanol-blended gasoline.

Farmland prices doubled nationally in the 2000s, to more than $2,300 per acre, according to the US Department of Agriculture, and prices today in soil-rich areas of Iowa and Illinois are more than three times that level. Values for nonirrigated cropland soared by 10 percent or more in 2010 alone in states across the Midwest, according to the Federal Reserve Bank of Kansas City.

Net cash yields cluster around 3.5 percent for corn land in Iowa and wheat land in Kansas. At the height of the 1970s boom the net cash yield was 4.55 percent.

As corn prices have shot upward, so has Iowa farmland, which is selling for $8,500 to $10,000 an acre.

Recently an 80-acre parcel was auctioned in Mitchell County, Iowa, going for $10,000 an acre, or $800,000. But with only 72.2 acres actually tillable, it works out to $11,080 an acre — a country record.

Grant's Interest Rate Observer provides some color to the auction. It turns out the farmers bidding for the ground dropped out at $9,000 an acre and then two investors took it the rest of the way. A gentlemen who attended the auction said it was the slowest he'd ever seen. The last $1,000 was bid up in $25 increments.

In Kansas, with wheat going for $3.25 a bushel, the land is going for $1,500 an acre, double what it was five years ago.

Bottom line: Myriad government interventions have been producing pockets of bubbles in the US and the global economy.

Corn Prices Drifts near Record Highs Amidst Stock Market Turmoil, Signs of Stagflation?

Recently, prices of corn raced to record highs, although downside volatility has dominated the past few days. Nevertheless corn still drifts at near record levels.

Chart from Ino.com

Bloomberg’s chart of the day posits that demand has been outpacing supply as the alleged main reason.

From Bloomberg,

Corn demand is accelerating beyond farmers’ ability to boost yields, depleting stocks and adding to price gains as consumption in China and ethanol factories grows.

The CHART OF THE DAY shows gains in farm productivity have trailed demand that expanded more than fourfold since 1961, according to U.S. Department of Agriculture data. Consumption accelerated in the past decade on Chinese demand for feed and corn starch and increased use in the U.S. for ethanol output.

Corn futures climbed 86 percent in the past 12 months, more than any other grain traded in Chicago, after dry weather limited the 2010 U.S. crop and as flooding in the past two months delayed planting, threatening prospects for this year. July delivery corn rose to a record $7.9975 last week.

“It’s a huge problem,” Abdolreza Abbassian, a senior economist at the United Nations’ Food and Agriculture Organization, said from Rome. “This is primarily U.S. ethanol and starch in China, and then you have the feed where you have stronger growth, again in China, but across the world.”

Consumption demand represents an oversimplistic tale.

There are many questions to ask

To what degree of consumption has been artificially boosted easy money globally?

How much of the imbalances or diversion of resources have been due to subsidies to ethanol?

To what degree has restrictive trade policies (locally or internationally) has contributed to hampering of the supply side?

To what degree of local based regulations has contributed to boosting the demand side?

Why has there been a generalized increase in food prices if consumption has only been the major factor involved?

There are many more.

It’s easy and popular to attribute consumption growth to China, but China has been in the process of inflating her ballooning bubble economy, which means whatever growth we see, a large segment of which must be artificial.

Only when China’s bubble implodes shall we see the true extent of the consumption ‘growth’ story.

Lastly high corn prices as stock markets undergo selling pressures seem much like symptoms of stagflation.

From Tradingeconomics.com

Even in the US, statistical inflation figures has been going higher.

Yet the mainstream keeps denying them. Data from recent news, as producers and consumer prices indices, reveals that prices have risen beyond the expectations of the ‘experts’. This even comes in the face of the questionable method of computing for inflation indices.

Incidentally, denial makes up the 2nd stage of the Kubler Ross grief cycle. This denial is especially strong for those blighted with ideological (political and economic) biases.

It will take more pain for these people to finally reach the state of acceptance or reality, especially for those who insist to live in a self-designed world.