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Published on November 11th, 2008 | by Nick Chambers

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With New Ethanol Price Volatility, Farmers are at a Loss

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When the only factor that determined if farms lived or died was the price of food, farm income was rather boringly steady. Now that biofuels have given agriculture a value greater than staple food crops, farmers have seen some huge rewards. But with those rewards have come greatly increased risks — risks that farmers are finding out the hard way right now.

According to the University of Illinois at Urbana-Champaign, the ethanol boom helped drive two years of record profits for farmers, but in these last two years, grain farmers have become increasingly disengaged from the stable food markets of the past, and placed their bets on the biofuel market.

“We’re just experiencing the full brunt of this new source of volatility,” said Scott Irwin, a professor of agricultural and consumer economics.  “When food prices were the main trigger, recessionary impacts were much less direct and much more gradual. Now, there’s this new connection through energy costs that immediately gets translated to agriculture.”

Last summer, corn prices were at $8 a bushel on the futures markets due to rising gas prices. But as demand for fuel has fallen with a weakening economy, speculators have pulled out of the commodities markets and corn prices have plumetted. Currently corn prices are at $4 a bushel, half the value of their summer high. Irwin predicts corn prices will stay that low until “the economy rebounds from a recession that could be the nation’s deepest since World War II.”

Even so, at $4 a bushel that’s nearly 50% higher than it was from 1973 to 2006 when the average price was $2.42 a bushel.

I guess the conclusion to be drawn from this is that, even if the biofuels market has drastically increased the volatility of farm income, the prices farmers are seeing today, even at their lowest, are much higher than they have been at any point in modern history — due mostly biofuels.

Source: University of Illinois News Bureau

Image Credit: Nicholas_T‘s Flickr photostream under a Creative Commons License


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About the Author

Not your traditional car guy.



  • Doug

    Yet another example of this countries refusal to think before they act. Lets take all of our food staples and use them to make an inefficient fuel. This way we can make an expensive fuel and drive food costs to never before seen levels. That way the major food companies can have record profits just like the oil industry. Yay USA!

  • Doug

    Yet another example of this countries refusal to think before they act. Lets take all of our food staples and use them to make an inefficient fuel. This way we can make an expensive fuel and drive food costs to never before seen levels. That way the major food companies can have record profits just like the oil industry. Yay USA!

  • robotech master

    “the economy rebounds from a recession that could be the nation’s deepest since World War II.”

    Love that quote… have we even had one month where we’ve been in a recession… Now granted he could be talking about the future when obama takes over and destroys a very fragile market… but as long as obama doesn’t get stupid were not going to be going into any major recessions.

  • robotech master

    “the economy rebounds from a recession that could be the nation’s deepest since World War II.”

    Love that quote… have we even had one month where we’ve been in a recession… Now granted he could be talking about the future when obama takes over and destroys a very fragile market… but as long as obama doesn’t get stupid were not going to be going into any major recessions.

  • Laddy

    You fail to mention what’s happened to the cost of our inputs. Seed, chemicals, and anhydrous ammonia are all through the roof. Seed corn per acre will be over $100 this year. Our total inputs per acre not long ago were $100 per acre total for corn. Marginal production costs per acre for corn (which does not consider land rent, land taxes, depreciation on equipment, and interest) will be from $450-$550 per acre this year, depending on volume discounts and how much elevators are charging for storage and drying etc. These are mostly costs paid up front in the fall and early spring before the first seed is planted. Soem farmers paid cash rents of $400 per acre this year to land owners. They won’t make a profit this year. If one farms 1,000 acres that’s $500,000 upfront and lots more if the farmer is cash renting. That a sizeable risk. $4.00 corn and $9.00 soybeans are generally considered breakeven prices with all costs considered. The $4.00 price quoted is not the delivered price to the elevator either. Delivered price to the elevator is usually 20 – 50 cents less. Also when farmers were receiving the amount quoted of $2.42 a bushel for corn, our profits came from LDP payments (farm program) from the government as that price wouldn’t allow for a profit with all costs considered. One of the driving forces for higher grain prices were record exports this year. With the dollar on the rise against other currencies, exports have fallen off. Excess corn was being used to make ethanol because it was dirt cheap to do so. The high summer prices only existed because of speculation in the commodities market. No one sold all of this year’s crop for $7 or $8 dollars because that was the price on the Exchange and not the delivered price to the elevator. We presold have of our expected crop for a $5 per bushel average. As a general rule we do well one or two years per decade. The other years we just get by. Even then we struggle to earn a 4% return on the cost of the land. We aren’t getting filthy rich by any means and we own nearly all the land we farm.

  • Laddy

    You fail to mention what’s happened to the cost of our inputs. Seed, chemicals, and anhydrous ammonia are all through the roof. Seed corn per acre will be over $100 this year. Our total inputs per acre not long ago were $100 per acre total for corn. Marginal production costs per acre for corn (which does not consider land rent, land taxes, depreciation on equipment, and interest) will be from $450-$550 per acre this year, depending on volume discounts and how much elevators are charging for storage and drying etc. These are mostly costs paid up front in the fall and early spring before the first seed is planted. Soem farmers paid cash rents of $400 per acre this year to land owners. They won’t make a profit this year. If one farms 1,000 acres that’s $500,000 upfront and lots more if the farmer is cash renting. That a sizeable risk. $4.00 corn and $9.00 soybeans are generally considered breakeven prices with all costs considered. The $4.00 price quoted is not the delivered price to the elevator either. Delivered price to the elevator is usually 20 – 50 cents less. Also when farmers were receiving the amount quoted of $2.42 a bushel for corn, our profits came from LDP payments (farm program) from the government as that price wouldn’t allow for a profit with all costs considered. One of the driving forces for higher grain prices were record exports this year. With the dollar on the rise against other currencies, exports have fallen off. Excess corn was being used to make ethanol because it was dirt cheap to do so. The high summer prices only existed because of speculation in the commodities market. No one sold all of this year’s crop for $7 or $8 dollars because that was the price on the Exchange and not the delivered price to the elevator. We presold have of our expected crop for a $5 per bushel average. As a general rule we do well one or two years per decade. The other years we just get by. Even then we struggle to earn a 4% return on the cost of the land. We aren’t getting filthy rich by any means and we own nearly all the land we farm.

  • redherkey

    Ethanol was quite the gamble and one I couldn’t understand. Given the more consistent demand from industrial, trucking and railroad consumption and average $1.00/gal. more for diesel, biodiesel plants made much more sense. Yet in western Iowa, we’ve seen an overwhelming majority of corn-based ethanol plants developed. One coming online just south of Council Bluffs Iowa will face immediate challenges from no price support and a President and Congress hostile to existing subsidies.

  • redherkey

    Ethanol was quite the gamble and one I couldn’t understand. Given the more consistent demand from industrial, trucking and railroad consumption and average $1.00/gal. more for diesel, biodiesel plants made much more sense. Yet in western Iowa, we’ve seen an overwhelming majority of corn-based ethanol plants developed. One coming online just south of Council Bluffs Iowa will face immediate challenges from no price support and a President and Congress hostile to existing subsidies.

  • Chris

    Laddy is spot on. Out input costs are going to be hovering around the $800/acre range. We need to average 200 bu/acre corn @ $4.00/bu just to break even(we usually average around 175 bu/acre, so you do the math). A brief summer of wild speculation led to a couple of months of high commodity prices and all you read about was how much money farmers were making and how expensive food was going to be. The reality is that most farmers had their corn sold before it got that high and we’re unwilling to risk selling a significant portion of their new crop. If input costs don’t go down, or if the price of corn doesn’t go up, corn farmers are going to be in for a very tough time. And people wonder why the family farm has all but disappeared.

  • Chris

    Laddy is spot on. Out input costs are going to be hovering around the $800/acre range. We need to average 200 bu/acre corn @ $4.00/bu just to break even(we usually average around 175 bu/acre, so you do the math). A brief summer of wild speculation led to a couple of months of high commodity prices and all you read about was how much money farmers were making and how expensive food was going to be. The reality is that most farmers had their corn sold before it got that high and we’re unwilling to risk selling a significant portion of their new crop. If input costs don’t go down, or if the price of corn doesn’t go up, corn farmers are going to be in for a very tough time. And people wonder why the family farm has all but disappeared.

  • Pete

    Laddy and Chris are both right. Another point: Now that on farm corn prices are hovering around $3.00 have you noticed your food costs plummeting? Didn’t think so. Remember that the next time farm prices are blamed for high food prices.

  • Pete

    Laddy and Chris are both right. Another point: Now that on farm corn prices are hovering around $3.00 have you noticed your food costs plummeting? Didn’t think so. Remember that the next time farm prices are blamed for high food prices.

  • http://gas2.org Sherry (Pottebaum)

    I totally agree with the comments made by both Laddy & Chris. Our input costs skyrocketed this year–but weren’t even mentioned in the article. (To Laddy’s list you can also add higher insurance premiums).

    Like many other farmers I presold half of my expected crop before prices soared in the summer. Due to the heavy rain last Spring much of our planting was delayed my almost a month (resulting in much larger drying costs this Fall) and some fields were washed out. We didn’t dare sell more grain by the time prices reached $6.-7.00 because we weren’t sure we were even going to be able to cover our earlier sales.

    We also are fortunate to own all of our own farmland but we certainly aren’t getting rich!

    Sherry

  • http://gas2.org Sherry (Pottebaum)

    I totally agree with the comments made by both Laddy & Chris. Our input costs skyrocketed this year–but weren’t even mentioned in the article. (To Laddy’s list you can also add higher insurance premiums).

    Like many other farmers I presold half of my expected crop before prices soared in the summer. Due to the heavy rain last Spring much of our planting was delayed my almost a month (resulting in much larger drying costs this Fall) and some fields were washed out. We didn’t dare sell more grain by the time prices reached $6.-7.00 because we weren’t sure we were even going to be able to cover our earlier sales.

    We also are fortunate to own all of our own farmland but we certainly aren’t getting rich!

    Sherry

  • http://twitter/jpat1eco JP

    That may not last long. Anyone who might have sold them on the idea of corn for bio-fuel as a feedstock, pitched them on an idea that would never work long term.

    LOW COST feedstocks for the BTL market are not and never will be CORN.

    If you’re not the low cost provider in the end you go out of business.

  • Doug

    I don’t think any informed consumer blames the farmers for the increase in food prices. The blame is squarely on the shoulders of the food and oil giants. They have found a way to gouge the American people and the government just smiles and gives them tax breaks. Funny gas prices are down to around $2.00 a gallon, but food prices have not dropped a .01. Go Kraft!!

  • Doug

    I don’t think any informed consumer blames the farmers for the increase in food prices. The blame is squarely on the shoulders of the food and oil giants. They have found a way to gouge the American people and the government just smiles and gives them tax breaks. Funny gas prices are down to around $2.00 a gallon, but food prices have not dropped a .01. Go Kraft!!

  • Mark in Texas

    As Laddy and Chris point out, the economics of corn are a lot different this year than they were last year.

    Let me look into my crystal ball and predict that a lot of acres that were planted in corn this year will be planted in soybeans next year to avoid the cost of anhydrous ammonia and because many farmers who had been rotating between corn and soybeans have been planting corn every year because of the high prices.

    The reduced supply of corn is going to tend to keep prices from falling as much and the increased supply of soybeans is going to keep soybean and vegetable oil prices low. I am not sure that the low vegetable oil prices are going to be low enough to make biodiesel economically viable. The reduced demand for anhydrous ammonia and corn seed are going to result in reduced prices for those commodities so that farmers can make a profit even at $3.00 a bushel and 175 bushels an acre. With reduced corn prices, the ethanol plants will be able to make ethanol and sell it for 10 to 30 cents a gallon less than the wholesale price of gasoline.

    The problem is that this new stability might not happen next year. It might take two or three years to stabilize if there are no new wild price shocks caused by trader speculation, hurricanes in the Gulf of Mexico or some damned thing in the Middle East.

    My personal guess is that since Russia is being hurt by oil prices less than $60 a barrel, they are going to stir something up, probably by helping Iran build a nuclear bomb. Once Iran goes nuclear, they will be able to sponsor insurgencies against all their neighbors without fear of reprisal. Think of a couple of hijacked super tankers blocking the Straights of Hormuz. This will bring the price of oil back up where the Russians want it.

  • Mark in Texas

    As Laddy and Chris point out, the economics of corn are a lot different this year than they were last year.

    Let me look into my crystal ball and predict that a lot of acres that were planted in corn this year will be planted in soybeans next year to avoid the cost of anhydrous ammonia and because many farmers who had been rotating between corn and soybeans have been planting corn every year because of the high prices.

    The reduced supply of corn is going to tend to keep prices from falling as much and the increased supply of soybeans is going to keep soybean and vegetable oil prices low. I am not sure that the low vegetable oil prices are going to be low enough to make biodiesel economically viable. The reduced demand for anhydrous ammonia and corn seed are going to result in reduced prices for those commodities so that farmers can make a profit even at $3.00 a bushel and 175 bushels an acre. With reduced corn prices, the ethanol plants will be able to make ethanol and sell it for 10 to 30 cents a gallon less than the wholesale price of gasoline.

    The problem is that this new stability might not happen next year. It might take two or three years to stabilize if there are no new wild price shocks caused by trader speculation, hurricanes in the Gulf of Mexico or some damned thing in the Middle East.

    My personal guess is that since Russia is being hurt by oil prices less than $60 a barrel, they are going to stir something up, probably by helping Iran build a nuclear bomb. Once Iran goes nuclear, they will be able to sponsor insurgencies against all their neighbors without fear of reprisal. Think of a couple of hijacked super tankers blocking the Straights of Hormuz. This will bring the price of oil back up where the Russians want it.

  • Mark in Texas

    As Laddy and Chris point out, the economics of corn are a lot different this year than they were last year.

    Let me look into my crystal ball and predict that a lot of acres that were planted in corn this year will be planted in soybeans next year to avoid the cost of anhydrous ammonia and because many farmers who had been rotating between corn and soybeans have been planting corn every year because of the high prices.

    The reduced supply of corn is going to tend to keep prices from falling as much and the increased supply of soybeans is going to keep soybean and vegetable oil prices low. I am not sure that the low vegetable oil prices are going to be low enough to make biodiesel economically viable. The reduced demand for anhydrous ammonia and corn seed are going to result in reduced prices for those commodities so that farmers can make a profit even at $3.00 a bushel and 175 bushels an acre. With reduced corn prices, the ethanol plants will be able to make ethanol and sell it for 10 to 30 cents a gallon less than the wholesale price of gasoline.

    The problem is that this new stability might not happen next year. It might take two or three years to stabilize if there are no new wild price shocks caused by trader speculation, hurricanes in the Gulf of Mexico or some damned thing in the Middle East.

    My personal guess is that since Russia is being hurt by oil prices less than $60 a barrel, they are going to stir something up, probably by helping Iran build a nuclear bomb. Once Iran goes nuclear, they will be able to sponsor insurgencies against all their neighbors without fear of reprisal. Think of a couple of hijacked super tankers blocking the Straights of Hormuz. This will bring the price of oil back up where the Russians want it.

  • LonnieB

    Not being a farmer (although I did live on a farm in Tennessee until I left high school), I can’t sit at the same table as most of the posters here. But as an outside observer, I have a couple questions that pertain more to the future than the present.

    How will a perfected cellulosic process (on a massive scale) change this equation?

    Could this technology have an impact on how many farmers choose to raise food crops, as opposed to fuel crops?

    I know the questions do nothing to address the current situation, but it seems to me that we, as a nation, are barreling down the road while looking only at the pavement immediately in front of us, instead of looking further ahead down the road. That’s a recipe for disaster, but it’s the recipe that got us where we are today.

    I ask these questions out of sympathy for the farmers, who have been manipulated by a greedy marketplace into a very difficult situation, and are hobbled by an increasingly out of touch government.

    I strongly believe that cellulosic technology will open a broad spectrum of cash crops better suited for ethanol than corn. I’m sure some farmers out there agree.

    I don’t pretend to understand farm subsidies, so please pardon my naiviety on the subject. But common sense tells me that money invested in first, the new technology (cellulosic production), and then in machinery (planters, harvesters, etc.) and a supporting infrastructure (transportation and distribution of crop and product) would be money better spent for the future of farming.

    I have been told that many farmers are paid to NOT plant as much of a crop as they could potentially plant. If that is true, then it makes this whole food vs. fuel arguement stupid and irrelavent.

    If ethanol plants or starving Ethernopians need more corn, then plant it and tell the government to give the money to the tree huggers trying to save the Farting Tree Bat. (It makes as much sense!)

    But I guess that’s the brilliance of our government.

    As usual, I agree with Mark_in_Texas. Until we step up as a nation of inventors and problem solvers, instead of a nation of politically frighten hand wringers, then we will be at the mercy of the likes of Pootie and Ahmadinnerjacket.

    The messiah-elect is in for some rude awakenings. Let’s hope he can do more than just vote “Present”.

  • LonnieB

    Not being a farmer (although I did live on a farm in Tennessee until I left high school), I can’t sit at the same table as most of the posters here. But as an outside observer, I have a couple questions that pertain more to the future than the present.

    How will a perfected cellulosic process (on a massive scale) change this equation?

    Could this technology have an impact on how many farmers choose to raise food crops, as opposed to fuel crops?

    I know the questions do nothing to address the current situation, but it seems to me that we, as a nation, are barreling down the road while looking only at the pavement immediately in front of us, instead of looking further ahead down the road. That’s a recipe for disaster, but it’s the recipe that got us where we are today.

    I ask these questions out of sympathy for the farmers, who have been manipulated by a greedy marketplace into a very difficult situation, and are hobbled by an increasingly out of touch government.

    I strongly believe that cellulosic technology will open a broad spectrum of cash crops better suited for ethanol than corn. I’m sure some farmers out there agree.

    I don’t pretend to understand farm subsidies, so please pardon my naiviety on the subject. But common sense tells me that money invested in first, the new technology (cellulosic production), and then in machinery (planters, harvesters, etc.) and a supporting infrastructure (transportation and distribution of crop and product) would be money better spent for the future of farming.

    I have been told that many farmers are paid to NOT plant as much of a crop as they could potentially plant. If that is true, then it makes this whole food vs. fuel arguement stupid and irrelavent.

    If ethanol plants or starving Ethernopians need more corn, then plant it and tell the government to give the money to the tree huggers trying to save the Farting Tree Bat. (It makes as much sense!)

    But I guess that’s the brilliance of our government.

    As usual, I agree with Mark_in_Texas. Until we step up as a nation of inventors and problem solvers, instead of a nation of politically frighten hand wringers, then we will be at the mercy of the likes of Pootie and Ahmadinnerjacket.

    The messiah-elect is in for some rude awakenings. Let’s hope he can do more than just vote “Present”.

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