Agricultural Boom Is Misguided Policy

By David L. Brown

According to a report in the current issue of the magazine Agri-Marketing, 2007 saw record U.S. net farm income of $87.5 billion, “buoyed by booming demand of crops for biofuel production and record exports.” This is being viewed as good news by the farm industry, but I must add my note of warning that this may be setting up the ag sector for another boom-to-bust cycle.

According to the news item, the 2007 net income figure was up by nearly 50% over the previous year, and $30 billion more than the ten year average. The magazine reported that “land and cash rent prices are at record levels.”

Other “good news” included the fact that farmers planted 93 million acres of corn last year, causing sales of products and services by agri-businesses to skyrocket. These included seed, fertilizer, crop insurance, fuel, tractors and combines.

Finally, the magazine gloated about the fact that the new energy bill crafted by our wise and generous Congress “includes the Renewable Fuels Standard (RFS) which mandates the use of nine billion gallons of ethanol in 2008,” and scheduled to rise to 36 billion gallons by 2022. (Half of that is supposed to come from non-grain sources such as switchgrass but it could still represent 18 billion gallons from feed grains, an increase of 375% compared with the 4.8 billion gallons produced in 2006.)

Well, the problem with all this is that the whole scenario is unwise and unsustainable for several important reasons, including these:

• Biofuels made from corn and other food crops are only economically viable when the price of crops and petroleum are in a favorable ratio. Cheap corn and high oil prices make ethanol production profitable. But even though oil prices have spiked as high as $100 per barrel, demand by the exploding ethanol business has driven grain prices far above their historic range. Corn, the primary grain used in ethanol, has jumped to more than $5 a bushel in futures markets, up from a historic range close to $2. The cascading effect on other grains has taken wheat futures to more than $10 per bushel and soybeans to above $13. The potential profit from ethanol is seriously diminished as corn prices remain high.

• The future for alternative feedstocks such as switchgrass is in question. First, we do not yet have the technology to efficiently produce ethanol from so-called “cellulosic” sources. Second, farmers and the transportation infrastructure are not equipped to efficiently handle such materials. Third, even if we grow alternative crops for energy production, that will either take land out of production for feed grains or put into production marginal lands that would better be left in pasture, rangeland or forest.

• World food demand continues to climb and food scarcity is becoming widespread around the globe. Those nations that can afford to buy the dwindling amounts of available grain will continue to bid up the price against ethanol producers, while other nations face famine and food riots. This is creating a gathering economic and geopolitical train wreck as ethanol distillers and consumers around the world compete for the precious foodstuffs. Grain exports last year may have yielded more income, but due to rising prices rather than increased volume. This is creating a have vs. have-not crisis in world food security. Aid agencies are caught in a pinch when fixed budgets force them to reduce the amounts of food they can purchase for their programs.

• The ethanol phenomenon is a political issue that has virtually nothing to do with seeking solutions to energy needs. The U.S. government subsidizes ethanol to the tune of 51 cents per gallon, which is equal to $1.43 for each bushel of corn used to make the faux fuel. This government largess has nothing to do with assuring our nation’s energy supply, but is in fact pork barrel spending aimed at providing windfalls to farmers. We used to pay farmers not to grow crops; now we are paying them to grow crops for the wrong reasons. And if you think the people who are investing in ethanol production are doing so out of selfless concern, think again. They’re in it for the money with dollar signs in their eyes.

• Responding to strong incentives to plant more acres, farmers will put marginal land under the plow. This will result in increased erosion, further polluting and silting up streams and rivers and potentially contributing to a new Dust Bowl era.

• The cascade effect of rising demand for feed grains is causing food prices to rise across the board, since land formerly used for other crops has been diverted to growing crops for biofuels, and because dairymen and meat producers rely on feed grains as a major cost of doing business. American consumers through the misplaced generosity of our government are paying to cause our own grocery bills to climb dramatically.

Now that the farm industry is convinced it is embarked on a never-ending boom, we see a situation developing in which easy credit is surely luring farmers to take on debt. The Fed is feeding gasoline to this potential fire by dropping the bank discount rate by record amounts. In the face of the supposed mortgage crisis and sinking residential housing values, banks are leery of making new consumer loans — so those eager farmers with bright rosy futures ahead of them are a blessing to lenders. All that land at record prices, all those tractors and combines that are being sold in record numbers, all that and much, much more is surely being purchased with significant amounts of borrowing as farmers look into the future with starry-eyed optimism. As farmers count their unhatched eggs, eager bankers are standing by with open checkbooks.

One of the worst aspects of this, from the standpoint of farmers, is that many of them are investing not only in increased farm assets but also in the construction of ethanol plants. Many of the plants that are popping up like mushrooms across the nation are funded by local groups of investors, mainly farmers who hope to profit on both ends and probably much of it on once again on easy credit.

Well, we have seen this before, and many times. The continued meddling of government in agriculture has fed a cycle of boom and bust that seems to stretch back as far as anyone now living can remember, and probably back to the earliest days of agriculture in the Fertile Crescent. During the 1920s when stock markets were soaring, farmers were burning ears of corn in their stoves because they were worth less than coal. In the 1950s we paid billions to farmers not to grow crops. Then in the 1970s Agriculture Secretary Earl Butz exhorted producers to “plant fencerow to fencerow” to supply a supposedly endless world demand for food. Farmers responded, went into debt to buy land and machinery, and had the whole thing fall out from under them when the prime rate jumped as high as 21 percent and banks began to foreclose. Tens of thousands of farmers were ruined, and the cycle goes on.

That was then and today’s situation is different, to be sure. World demand for food is rapidly outpacing the ability of farmers to meet the needs of growing populations. The world food supply is dwindling and we entered 2008 with the lowest grain stocks ever, only about a 54 day reserve. People everywhere must eat or die, and it appears that the policy now being followed by the U.S. is to ask those who have been customers for our food to suck it up and starve. How will this sit in a world already simmering with hatred and resentment against our country? I know how I would feel if I were a hungry member of the third world and learned that Americans were using precious grain to power their SUVs. In fact, we already have seen reports of food riots in places such as Mexico (where the price of corn used in tortillas is up by 60 percent), Pakistan (where flour prices have doubled), Indonesia, China and even in Italy where the price of pasta has also jumped.

When you consider that ethanol is not particularly efficient, that its production may actually use nearly as much or possibly even more energy than it can replace, this is not a brilliant path that we are following here. The money being spent to subsidize corn used for ethanol could be invested in much better ways, i.e., increased R&D for truly efficient energy programs, allowing tax incentives for consumers to become more energy efficient, or many other possibilities. How many compact florescent light bulbs would it take to equal the energy savings supposedly created by the use of ethanol?

And just how much money are we talking about? Well, here is a simple back-of-the-envelope figure based on the subsidy of $1.43 per bushel of corn used in ethanol, and the estimated 114 million tons of corn from the 2008 crop projected to be used for that purpose if just 80 percent of the 62 new ethanol plants now under construction come on line later this year. There are 56 pounds of shelled corn to a bushel, and thus 35.7 bushels per ton. That translates to a subsidy of $51.05 per ton of corn. Multiply that by 114 million and you come up with approximately $5.8 billion that will paid to ethanol producers and farmers to turn corn from the 2008 crop into fuel.

As this disaster unfolds a hungry world looks on aghast. Our nation fully deserves whatever ills result from these misguided policies. We should hide our collective heads in shame.

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