|
|
|
The Blame GameAt this writing, corn is approaching $8 per bushel, wheat $9 and soybeans are just under $16. Due to this unprecedented rise in grain and protein prices, all livestock feeders are losing big money. Not only that, the cost of diesel fuel to operate farms, factories and transportation is at an all-time high. In the grocery store, prices are going up and restaurants, bars and all forms of industry and services that depend on food or fuel are raising prices. The culprit has to be out there somewhere and he needs a noose around his neck. It's ethanol! That's about as corny as the screenplay of a wild west movie, but it is the mentality of livestock producers, consumers and most media. The basis of the entire ethanol debacle comes down to capitalism and politics. The marketplace is determining the value of all commodities and consumers are determining their spending based on income and needs. The result is a major shift from cheap food and fuel to (relatively) high prices for both necessities. Ethanol is an easy target for blame as the industry is new, rural based and a major new buyer of corn. Ethanol has been around for 30 years but it came to the forefront in 1999 when politicians saw it as a means to impress Iowa voters in the 2000 primary election. Incentives for ethanol blending, passed by Congress, became the farm price support program of the 21st century and they are working much too well. Ethanol gave surplus corn a place to go at the same time gasoline makers lost their oxygenate, called MTBE, again a part of government regulation on clean fuels. This made ethanol the cheapest octane enhancer on the market and the profitability of ethanol production caused a wild rush to build bio-refineries. Congress again stepped in (energy legislation) and took a major political step to control the price of gasoline by guaranteeing a minimum quantity of ethanol would be blended with petroleum to shore up the floor on the production of an alternative form of energy. Nature's perfect storm then shorted the world wheat crop, drowned the Midwest and the U.S. dollar dropped in value. Nations with a purchasing advantage then began seeking supplies of corn and soybeans to improve the quality of their diets. Renewing our "lynch mob mentality" against ethanol, the livestock industry was caught flat-footed with large supplies of beef and pork and an unwillingness to make major inventory changes due to the attractive export market and the belief that the cyclical nature of high grain prices would mean a spike and a downtrend within a year. When that didn't happen, producer associations turned to Congress and sided with anti-ethanol groups to ask for alternatives to the alternative so their input costs would go down. Today the ethanol industry is in trouble, without a doubt. Investors are getting very limited returns and those companies that are publicly traded have a "sell" recommendation from most analysts. Construction of new plants is ceasing and many are idling back their production. The only reason they continue to produce is because oil is still going higher. Let's look for a minute at another factor in the rising cost of food and fuel: Wal-Mart, the place where you shop for all things cheap. The variety on the shelves comes mostly from countries that have plentiful and inexpensive labor (China, Malaysia and Vietnam) and we buy the backpacks, jeans and barbecue grills without reservation. In doing so, we have shifted our wealth to these nations who now want to buy our grain because they now have the ability to raise their standard of living. Free trade, which brought us great satisfaction when it sloped our way, is now causing great pain as the field levels. The oil industry is a more complex (but fascinating) example, as we have been given the impression that driving as big a vehicle as we could afford, as many miles as we wanted, was a God-given right and the price of fuel (like grain) would always be low. Today we have $4 gasoline and $4.60 diesel because we have become reliant on countries that are improving their standard of living by selling us their petroleum and buying our food and industrial products to do so. Economists say we are in a period of adjustment. Most say $2 corn is gone forever and the new equilibrium price is $5. If so, the price of grain fed beef is going to be three or four dollars above its current level. Will consumers buy as much at that price or will they shift to an alternative? SPAM sales are now skyrocketing. Low cost producers with a link to packers are the best bet for survival until equilibrium is re-established. Livestock farmers with corn fields will sell the cattle and hogs along with the grain and come out fine. Livestock operations that are small, independent and buying all inputs will go broke. Grain farmers are making money but have trapped themselves at these high prices with sharply higher values for land, machinery and inputs. If the grain market tumbles, the same shakeout will occur with them as is now happening in the livestock industry. Ethanol is to blame for everything other than politics, weather, oil and trade. It has brought a time of unprecedented prosperity to rural America and created a new economic base for many communities. The cycle of government payments encouraging overproduction has been disrupted and made a farm bill almost irrelevant. If that's a capital offense, I'll help you tighten the noose. Editor's Note: This is Ken Root's 34th year as an agricultural reporter. He grew up on a small farm in central Oklahoma and started his career as a vocational agriculture teacher. He worked in Oklahoma, Kansas and Missouri as a broadcaster and was the original host of AgriTalk. He has also been the executive director of the National AgriChemical Retailers Association in Washington, D.C. and the National Association of Farm Broadcasters in Kansas City. Ken is now the lead farm broadcaster at WHO and WMT Radio based in Des Moines, Iowa. He has been a columnist for HPJ and Midwest Ag Journal for seven years. 7/7/08 Date: 7/2/08 Advertisement
1
Copyright/Privacy
Copyright 1995-2009. High Plains Publishers, Inc. All rights reserved. Any republishing of these pages, including electronic reproduction of the editorial archives or classified advertising, is strictly prohibited. If you have questions or comments you can reach us at High Plains Journal 1500 E. Wyatt Earp Blvd., P.O. Box 760, Dodge City, KS 67801 or call 1-800-452-7171. Email: webmaster@hpj.com |
Market Snapshot Inside Futures |
