Ed Lotterman: Oil Prices, War, and a Bad Corn Crop
by Ed Lotterman (Bismarck Tribune) Unless National Security Adviser John Bolton and Secretary of State Mike Pompeo manage to gin up a war with Iran, the terrible crop conditions across much of the Midwest this year means that some fuel ethanol distillers will be shutting down operations.
Quibbles about the objectives of Trump administration officials aside, the statement is pretty straightforward — the two issues are connected.
Fuel ethanol uses corn as a feedstock. A bad crop pushes corn prices up, increasing costs to ethanol plants. But ethanol’s price depends on the cost of gasoline driven by world oil prices.
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Corn is a stellar example of a “homogeneous product” assumed in economists’ theoretical “perfect competition.” On the supply side, one bushel of No. 2 yellow corn is about the same as any other bushel. But its uses are myriad, so overall corn demand is aggregated among often competing and diverse markets.
This differs from soybeans that have virtually no on-farm use. All soybeans are sold by farmers and nearly all are crushed to separate the oil from the meal before their end use.
In contrast, much corn is used on farms, but in varied ways. Some 7 present of all corn acres harvested have the whole plant, stalks, leaves and ears, chopped up and fermented into silage that can only be used as feed for cattle. Hogs and poultry cannot digest it. Silage use is split between dairy and beef, with dairy the more important.
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Some corn is exported, but this is much less important than for soybeans. Typically about 15% goes abroad, about half the proportion of soy. Destinations are very different. Whereas China is by far the largest soy customer, Mexico now takes a fourth of all our corn with Japan nearly as much and South Korea and Colombia taking another 17%. Peru, with its 32 million people, takes 10 times as much as China with 1.4 billion. So while Trump’s trade squabbles with Mexico factor for corn farmers, trade with China has little relevance.
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As long as marginal revenue, the additional money from selling one more unit of output, exceeds marginal cost, one should produce more. Marginal cost is the increase in total expenses from producing that last unit. This is true even if operating margins are not high enough to cover all the fixed costs. It is better to cover some of the mortgage, taxes, insurance, etc. than none at all. In the long run, bankruptcy looms, but in the short term, operate and hope that input costs and output prices improve.
The upshot is that operations for which such fixed costs are a high fraction of the total, output does not rise and fall smoothly with market price. It often approaches an all-or-nothing situation.
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For corn sweetener producers, the bind is that their customers have organized production of beverages, baked and canned goods around the use of liquid corn syrup. It is not easy to switch back to the sugar that might have been used decades ago. Moreover, the U.S. sugar program, which keeps sugar prices here above world prices and thus fosters use of syrup, does not have any sort of relief valve if sugar prices jump. So as some corn syrup users at the margin switch to sugar, that price will rise also.
This leaves two categories, exports and ethanol. These will have to make most of the adjustment to a bad crop.
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Ukraine, France, Russia and even Romania and Hungary have become corn exporters and will pick up some of the slack from reduced U.S. production due to bad weather.
Now to the market manipulation. The U.S. renewable fuels law requires inclusion of ethanol in most gasoline. But, unlike sugar, there are few limits on imports.
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In other words, if fighting actually closed the Straits of Hormuz near the Persian Gulf, the resulting spike in oil prices could save the ethanol industry, for now. That, however, would be a minor factor barely offsetting bigger problems for our economy. READ MORE
Why farmers will never abandon President Trump (WND)
Excerpt from WND: As one of his first acts in office, President Trump canceled the EPA’s Waters of the USA rule. President Obama tried to extend the Environmental Protection Agency’s jurisdiction far beyond “navigable waterways,” as it has been since the 1970s, to farm ponds and even ditches or potholes with water in them.
Needless to say, farmers hated the Waters of the USA rule, and they won’t forget President Trump terminated it – just as he promised.
Agriculture is one of the most regulated businesses in America, and President Trump’s regulatory reforms and staunch support for property rights have a lot of fans down on the farm.
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A U.S. appeals court ruling would have forced tens of thousands of livestock farmers to report “greenhouse gas” emissions from manure on their farms and subjected them to citizen activists’ lawsuits.
It would have – until Trump’s EPA exempted farms from the reporting requirement. Any farmer with one head of livestock is grateful.
Meanwhile, the Green New Deal Democrats have all but promised to regulate “farting cows” out of existence, with the federal zealots looking to ban greenhouse gases and meat eating in their bid to keep the climate from changing.
Of course, eliminating cattle means eliminating feedlots, one of the primary users of corn.
The bad news for corn farmers doesn’t end there. As Democrats march further and further to the left in their climate change jihad, they are attacking ethanol, a biofuel made from corn, once championed as “renewable, clean energy.”
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Farm groups have long pushed for expanded use of gasoline with 15 percent ethanol, called E15, and President Trump delivered.
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He renegotiated the South Korea trade agreement and NAFTA, securing better terms that will boost ag exports, and he is providing trade assistance to farmers targeted by China’s illegal trade retaliation.
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They work for the future not just the present. While academics enjoy life-long tenure and the captains of industry, we are told endlessly, clamor for “certainty,” farmers gamble and battle every day against the uncertainties of nature and the elements. When they take out a loan to plant a crop, they have no “certainty” the rains will come. READ MORE
