We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are

Life, Liberty and the pursuit of Happiness.

That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed,

Sunday, September 09, 2007

Ethanol: The Other Corn-Fed Pork

By Bill Bonner

"You shall not press down upon the brow of labor this crown of thorns," said William Jennings Bryant, on July 9, 1896, in the most famous political speech in American history. "You shall not crucify mankind upon a cross of gold."

The proximate target of this gush of oratory was the gold standard. But look deeper. Behind the scene were millions of farmers who had made an age-old mistake. They had gone too deeply into debt in order to increase production. In short, they had overdone it. The burden of today's cogitation is that they overdo it regularly.
Judged as a businessman, the typical farmer would make a good veterinarian. Over and over, he walks into the same trap. When prices go up, he borrows in order to expand his holdings. He buys more equipment. He leases more land. And he plants more crops to take advantage of the high prices.

Of course, the extra production soon causes prices to fall. Then, all of a sudden, he is ducking his creditors and running up the phone bill to his congressman. Save our Farms…Spare Us from the Evil Bankers… Give us subsidies, tariffs, he asks.

Farm products - especially corn - have played such a large role in American history that like the odor of lemon madeleines in Proust, they recall for us a whole series of debacles.When the farmer gets into a jam, the entire nation feels the pinch. The earliest settlers in the New World learned how to grow corn; it saved their lives. Then, farmers settled in the rich bottomlands…and planted corn. Soon, they were spreading out beyond the Appalachians growing corn everywhere they could turn the earth.

The trouble in the early days was not growing the corn, but moving it. There were no roads, no canals, no railroads. So, the pioneers figured out that they could pack the energy of corn into a denser form that made it easier to store and easier to transport - corn whiskey.

No market is an island. Each one is connected to the mainland of human economy by tracks that bear a constant, and often curious traffic. After the American Revolution, the Founding Fathers attempted to pay off the nation's war debts by imposing a tax on whiskey. But the nine-cents-a-gallon tax on small producers was enough to set off another revolution - the Whiskey Rebellion of 1794, centered in Monongahela, Pennsylvania. The insurgents got their hands on one tax collector, for example; they sheared his hair, tarred him and feathered him. More comedy than tragedy, George Washington sent out 13,000 troops, who managed to round up 20 whiskey rebels. Two of them were convicted of insurrection, but soon pardoned; Washington said that one was a simpleton and the other was insane.

With the rifles back over the fireplace mantles, farmers went back to making whiskey…and produced so much that the price of the elixir collapsed. This was probably America's golden era, when corn liquor was so cheap anyone could get drunk any time of day or night. The wild Irish slums of New York and Boston were soon blighted by booze…while, out on the frontier, even Abraham Lincoln passed around a jug of 'corn.'
Then, a national epidemic of alcoholism gave way to a worse case of sobriety. The sour Temperance Movement arose - citing the many evils of Demon Rum and Cruel Corn Whiskey as Public Enemies No.1& 2. This infection of public improvement festered for nearly 100 years and finally broke out in a Constitutional Amendment completely outlawing alcoholic beverages in the United States of America. This was not without political consequences of its own; rum-runners, mobsters, and the Kennedy family all got rich.

But it was not temperance that changed the lives of the corn farmers; it was transportation. In the mid-1800s, first canals, later railroads, made it possible to deliver un-distilled corn all over the country. Suddenly, growing corn was more profitable than ever. The price of farmland west of the Mississippi soared. Kansas farmland went up four to six times between 1881 and 1887. The price of an acre of land on which you could grow corn rose as high as $200.

Nature was rarely kinder to the Great Plains than in the years following the War Between the States. It rained out on the prairies, raising crop yields to levels rarely seen before or since. And the new railroads made it possible, for the first time ever, to ship a bushel of corn - inexpensively - from the western prairies to the major cities in the East. Between 1880 and 1887, Kansas doubled the mileage of rail lines. In that same decade, railroad mileage quadrupled in Nebraska and rose 11 times in the Dakota Territory.
All over the Midwest, farmers planted corn, corn, and more corn.

What happened next could have been predicted - by anyone but a farmer, an investor or a banker.
The years that followed were dry…and as the crops withered, so did the credit available to farmers. In the last three years of the decade, mortgage lending fell to only 10% of the previous three years' activity. Land prices fell. And farmers went bust.

Today, it has been 35 years since a debtor was last crucified on a cross with any trace at all of gold content. But, in 2006, you could still go out to Kansas and buy an acre of farmland for only about $1,000. Adjusted to 1880 prices, that is only about $25, or barely 15% of the peak prices set 120 years ago.

But now, there's a new bubble out on the plains…and a new political scam to go with it. In Martin County, Minnesota, says Fortune Magazine, six new ethanol plants are either in operation or being built. In the last eight months, the price of corn has doubled, from $2 a bushel to $4.

Corn is not just a crop in the America; it is a currency. Corn is used to feed pigs and cattle. Corn syrup is a main ingredient in Coca Cola, candies, cakes, ice cream, hamburgers and many other products. When the price of corn changes, every calculation changes with it. The price of land, for example. An average acre in the mid-west produces 180 bushels. At $2, that puts the gross yield per acre at only $360. After costs, farmers had little left over - only about $30, according to Fortune.

But at $4 a bushel, corn farming becomes much more profitable…with net yields 10 times higher than they were two years ago. With that kind of money rolling over the plains, farmers grow bold. They begin to cast an eye over the "Property for Sale" section of the newspaper…and stop in at the John Deer dealership. In fact, Citigroup is expecting a 25% increase for John Deere shares.

In Martin County, Minnesota, an acre of farmland is already up to $4,000 - a price it hasn't seen in 25 years. What happened after the last peak? Corn went down, and farmers who had stretched to produce as much as they could, went broke. Land fell back to $1,500 per acre, where it stayed until the current boom.

Part of the trouble with this boom is that it depends on ethanol. Thirty-one new ethanol plants have been built in the United States since 2005. When corn was $2 a bushel, and oil was $70, they could make more than a dollar per gallon. But at $4 a bushel, their profits have fallen to 3 cents per gallon, on average. And if corn continues to rise, or ethanol prices fall, even with their subsidies, they will be losing money.

Meanwhile, farmers are eager to take advantage of these high prices; they are doing what farmers always do - they are overdoing it again. The US Department of Agriculture estimates that 90 million acres of corn will be planted this year - the most in 63 years.In other words, as corn rises in price, nature seems to wake up. Farmers plant record amounts. And the biggest consumers - particularly ethanol plants, which are expected to take up more than a quarter of this year's crop - cut back. Supplies increase. Demand falls. How long will it be before corn falls again?

Of course, this time could be different. Ethanol may be a fraud, but it's got the U.S. Congress behind it. Corn-fed pork might not be good for you, but there are 3 billion Asians yearning for more of it. On those facts alone, we wouldn't bet the farm. But at least we'd be doing our sums on the subject. Could we sell forward enough corn to pay for a few more acres? Or how about a new air-conditioned tractor?

Whether corn will go down soon, we don't know. But even if the price continues to go up, many farmers will still find a way to over-do it…and ruin themselves.

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