Barron's: Ethanol's Land Grab Bubble May Burst
Barron’s (paid subscription required) has an interesting lead story this week on the impact of the boom in ethanol on farmland prices.
The story basically says if you’re looking at corn ground as an investment, watch out: you might be getting in too late.
Excerpt #1:
Don’t Bet the Farm Farmland prices are soaring, thanks mainly to rising demand for ethanol. But like other bubbles, this one could get sunk. (Video) http://online.barrons.com/article/SB119882116265055389.html?mod=djemWR
Excerpt #2:
. . . The catalysts in the farmland bubble are federal subsidies to ethanol producers and the belief that ethanol demand will keep rising and that China’s and India’s new wealth will keep boosting global commodity prices.
Indeed, U.S. farmers are switching to corn from other crops, curbing supplies of food grains. Nationwide, from 2002 to 2007, the number of acres on which corn was planted rose 24%, to 86.1 million. And the energy bill recently signed by President Bush and strongly backed by both parties mandates that oil refiners eventually boost ethanol use as a gasoline additive to 36 billion gallons a year from the current seven billion gallons.
Aided by a drought that reduced food exports from Australia, net U.S. farm income will hit a record $87.5 billion this year. Americans spent $642.5 billion on food in 2006, up 4.5%. And warnings have begun appearing in print — see the Dec. 8 issue of The Economist — on TV and online about the end of “cheap food.” …
http://online.barrons.com/article/SB119882116265055389.html?mod=djemWR&apl=y
Of course, South Dakota is a part of this boom, at least eastern South Dakota and its part of the Corn Belt. This admission will confound my conservative critics but there are no easy answers when it comes to energy independnece. Short-term, foodstuff ethanol like corn may be a bridge to better, more ecological technologies like cellulosic ethanol. But I don’t think it is a long-term solution. There does appear to be some push on food prices because of rising corn prices. In the meantime, while I hope South Dakota’s farmers can take advantage of the ethanol boom and the increase in their land values, I hope it is also not an impetus for more out of staters to take an even greater control of our state’s natural resources. If the out of state capitalists read Barron’s, they might think twice.
Todd Epp
in Energy/Gas Prices, Environment, Ethanol
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Reader Comments (6)
A few issues to address here. First, there are few, virtually no subsidies for ethanol producers. (The only exception maybe the highly publicized grants to a few to attempt to produce cellulose ethanol.) The ethanol "subsidy" is a blender tax credit. For the most part this is pocketed by the oil companies. Only the few independent stations which have blender pumps qualify for the credit. Second, the article and analysis contribute to the myth that ethanol is responsible for higher food prices. Ethanol production has little impact on food prices, according to the USDA. One hundred dollar a barrel oil and nearly four dollar a gallon diesel have far greater impact on food prices. Noone eats field corn used in ethanol production. And high-protein distillers dry grains are a livestock feed by-product of ethanol production. The bulk of the corn used for ethanol production returns as livestock feed. Third, if one is to believe investor Jim Rogers (Hot Commodities and Bull in China), we are in the midst of a cyclic commodities boom. (No doubt to be followed by the "farm crisis" of 201x.) Even without the introduction of ethanol the commodity boom by itself would drive increases prices of farmland. Fourth, hopefully the cellulose ethanol promise will mature faster than thought which will usher in a conservation-based crops of switchgrass or muscanthus.
Don't fall for the line that higher grain prices mean higher food prices. Corn sells for about 8 cents a pound today verses 4 cents a pound three years ago. Sure it has doubled, but a box of corn flakes still weighs a pound so the higher corn prices are responsible for 4 cents of the price increase and only 8 cents of the total price. The value of the grain in the food you eat is irrelevant to the price of that food. Processing, transportation, corporate profits and retail markups are a much bigger portion of the food dollar.
On the other hand land prices in my part of SD have quadrupled in the last ten years. There may very well be a land price bubble right now. Buying farmland is not for the faint of heart. Some speculators have made huge profits buying land, holding for a few years, and reselling. But in the end someone is going to get caught holding the bag.
The massive conversion to growing corn here has the potential to lead to terrible environmental degradation in South Dakota.
Corn is an environmentally hostile crop, already an extremely artificial plant [from line-breeding of grasses], it cannot grow naturally. It requires huge amounts of water and chemical pesticides, and corn tillage practices have led to soil loss and pesticide input to water supplies on a staggering scale.
So yes, I'm pretty cranky about the "corn ethanol industry," which appears to my admittedly ignorant self to be simply a cluster-f*** of corporations lobbying for government wealth transfer. Yes, farmers do get some benefits from this profitable crop, but only at great risk to their farmland, which is their economic future.
I think your last poster assumes that farmers are incensitive to the future of their land, and nothing could be further from the truth. The last person who wants to see the productivity of the land lost - is the farmer who owns it (or rents at a pretty high rate these days). Crop rotations, genetic improvements, and watching out for spending more than is necesary on expensive chemicals all work against the last poster's perspective. As to the economics of any energy production, before somebody picks out the blender credit, or the tax structure on wind towers, best look at how much largese the federal government puts into the other sources too -- oil depletion allwoance, solar tax credits, strategic global expenditures, roads in coal fields, the list goes on. If all eneergy sources were fully costed, you may be suprised to find outjust how valuable and cost-effectice it is to spend your money at home here in South Dakota on energy development --- and the "development" isn't done yet.
South Dakota Watch may not have the most comments but it has the most intelligent ones. What an excellent discussion about the pros and cons of ethanol! And all without name calling. Thanks to all for your thoughtful and reasoned comments.
Todd
That sidewinding polecat, Lee Schoenbeck, has a good post about considering the full costs of any energy source. I would also add the cost of keeping several US Navy carrier groups stationed in the Persian Gulf to the true cost of oil. We all know that the only reason that they are there is to protect the supply of oil. If the Middle East was a sandy waste and half of the world's oil was in Argentina and Chile we would be protecting the Straits of Magellan instead of the Straits of Hormuz.
Todd,
If it would make this corner of the SD Blogosphere feel more like home to some folks I'll break down and start calling people names.
Nick Nemec (straight shooting, former Marine, kind to small kids and old dogs, all american kid)