This Can't End Well...

This cannot end well.  This cannot end well for anybody.  While there are clearly a host of forces at work in the world of agriculture today, the decision to remove 30-35% of the corn crop from the food supply will one day soon be acknowledged as a very bad mistake.  At the present time, if there is any benefit going to the consuming public through lower gasoline prices as is alleged by the ethanol supporters, it is being paid for almost exclusively on the backs of poultry, livestock and milk and  egg producers primarily in the United States.  There is just such a woven set of consequences to this that it is hard to pry them all apart.

One of the clear consequences is that the United States users of corn will be resting on the precipice of a nearly non-existent “stocks-to-use” ratio until the miracle workers in the seed and grain technology area find a way to boost yields by 40-50% or more.  The best estimates are over 10 years from now but coming.  That precipice will require livestock producers to hold much higher levels of equity on a routine basis because of the wild fluctuations in input prices and therefore cash flow.  “When you are out of cash, you are out of business”.  That means they will by necessity borrow less, especially for capital items and pay more for all borrowed money.  The return on equity in the livestock production sector will fall by definition.

The race to supply assurance is already going on in this country and throughout the world.  What that means is contracting and tying up corn supplies and corn production areas in extra-market transactions.  It is hard to imagine that anyone forecasted that the ethanol mandates and subsidies would result in less market price transparency and the inevitable increases in consolidation and concentration.  The day is on the way, when just like the hog markets; 10-15% of the corn supply will be setting the price in what will become thinly traded markets.

It is almost a blessing that this drowned out spring occurred early in the life of the ethanol debacle in order to demonstrate what can and will happen if it is continued.  Corn has moved from the mid $2.50/bu range to $7.00/bu in less than two years.  The adjustments to that have created a huge surge of collateral dislocations in just about every industry it has touched including the corn industry itself.  If they have a crop this year, it will be like a license to print money but they are already grousing about the tripling of land costs, land rents, fertilizer and seed costs etc. etc.  They are right to be grousing and I have a feeling it is only the beginning.