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Tuesday, April 10, 2007

More on the impact of the ethanol mandate

Now that the government has increased the demand for corn through its ethanol mandate, farmers are responding as expected. The acreage of corn will increase dramatically, but alas the corn will not be grown on land that is currently uncultivated. Nope, the farmers are taking land out of cotton and soy bean and moving into corn. The upshot? The ultimate impact on the price of corn is ambiguous, but I have the feeling the price will go up. However, the supply of cotton and soy will decrease and this will cause an increase in price for these products. Whether the increases in inputs have a dramatic increase on the prices of final goods is an empirical question, it is entirely possible that a fifteen percent increase in the price of cotton would have a very minor impact on the price of blue jeans and bed sheets.

However, if the weather turns and the corn crop is a bust? The government will likely be asked to bail out the farmers who responded to the government-induced increase in the demand for corn.

From this week's BEEF Stocker news:
Farmers intend to plant the most acres of corn since 1944 when 95.5 million acres were planted, according to USDA's "Prospective Plantings" report issued April 30. The 90.5 million acres -- 15% more than last year -- ran at the top end of most industry estimates ahead of the report.

Iowa and Illinois, which churn out the most corn each year, each are adding more than 1 million acres of corn for totals of 13.9 million acres and 12.9 million acres, respectively. According to the report, producers in Nebraska and North Dakota are also aiming to plant approximately 1 million more acres.

As expected, much of the increased corn planting is coming from soybean ground. According to the report, producers intend to plant 67.1 million acres of soybeans, 11.1% less than last year.

Cotton planting is expected to decline 20% to 20.1 million acres.

From another source, Southeast Farm Press Daily, comes a report that Georgia farmers are going to double the acres of corn (to 500,000) and reduce the acres of peanuts by 14%. Cotton acreage will be down approximately 17%. On the other hand, Georgia farmers will plant about 60% more acres of soy beans, about 12% more tobacco, 73% more wheat, and about 5% more hay.

All of this suggests to me that the prices across different agricultural products will likely be more volatile this year (and the next few?) as the agricultural market tries to reach a new equilibrium after the large increase in corn demand mandated by the Federal government.

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