Saturday, April 14, 2007

Market Distortions

Last week the Department of Agriculture reported huge swings in planting acreage for 2007. Corn planting is up 13% while soy beans, wheat and cotton are all down double digits. I spoke with some farmers this past week on their choices and found half are planting more corn and the others are staying with the same rotation.

Farmers who choose to plant more corn can do so, but at a huge cost. Normally you plant corn one year and something else the following year. Corn is hard on the soil and so you give it a break to recoup. However, you can plant back to back corn crops using expensive fertilizers and chemicals.

Ethanol plants can get 1.5 gallons out of a bushel of corn. Farmers are betting corn is going to go up, but at $4 per bushel, the cost of the corn in terms of an ethanol gallon is $2.67 and that does not take into account energy, labor or equipment.

Ethanol plants purchased long term corn futures, but these only can last so long before, ethanol producers have to pay market prices. When this happens, they will either go to the taxpayer for a bailout or go out of business. What happens to the farmers who gambled on ethanol buying the corn?

Have you noticed how the price of food has increased these past six months? Ethanol is distorting the market and our government is helping them do it by using our tax dollars. Even though you may not buy ethanol, you help subsidize those who do to the tune of 52 cents per gallon.


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