Corn production not risk-free

The increased demand for corn, generated at least in part by demand from ethanol plants, has touched off a hot debate over how ethanol producers and livestock producers will live in harmony.

Another concern deals with how grain farmers in the Southeast can take maximum advantage of the current economic situation and live in profitable harmony with both groups.

“I’m a farmer in a grain dealer’s disguise, says Jim King, an officer with J&J Commodities in Greenville, N.C., and a long-time grain trader. “I grew up on a farm, and I understand the hard road grain farmers in the Southeast have traveled in recent years,” he adds.

To maximize benefit from the high price of corn, soybeans and wheat, farmers need to have a marketing program that allows them to think ahead and the flexibility to act when changes in the market occur. To think that corn price is permanently fixed at $4 or higher is a big mistake, King stresses.

Crop yields and oil prices will have huge impacts on grain prices.

Farmers have an opportunity to make some money in the next few years, but there are still risks, King says.

Ethanol producers cannot produce ethanol as profitably using $4.20 per bushel corn as they can using $2.80 per bushel corn. At some point the high cost of corn will cause ethanol plants to lose money.

From the farmer’s perspective, one rule of thumb, King says, is to sell corn from land you own differently from land you rent. If a grower knows most of the fixed costs associated with his corn crop and knows he can make money at $4 per bushel, he should book a higher percentage of the crop, King says.

On the other hand, the high price of corn will continue to push land rent prices up, so holding out more corn from those acres is a smart thing to do, according to the grain dealer.

“Farmers need to understand that $4 corn doesn’t mean profit, if you change the inputs it takes to grow it. We’ve seen land rent go from $105 to $145 per acre. We’ve also seen land in eastern North Carolina that previously people didn’t want to rent, now has farmers standing in line to farm this land,” King explains.

Growing corn on marginal land in the Southeast may be the epitome of risk. Putting the highest valued crop on the best land is a better bet, and if that crop is corn, growers will do much better growing fewer acres of corn on better land than growing too much corn on marginal land.

Traditional Southern crops, like cotton and peanuts will likely see yields go down in 2007, because farmers are putting higher value grain crops on land that has traditionally been reserved for peanuts and cotton.

“Farmers shouldn’t get so carried away with high corn prices that they get away from good rotations. Corn at $4 per bushel is high, but not unprecedented, it could go to $6 per bushel. If a grower books corn for $4 and has a crop disaster, he could be selling his corn for $4 and buying corn for $6,” King adds.

If corn is out of synch with soybeans or other crops grown on the farm, smart farmers are going to still plant a good rotation. Otherwise, they may have to plant low value crops in 2008 to get back into rotation, King says.

The current high price of grain increases the cost of grain dealers doing business, says Dean Hill, with Interstate Commodities in Orange Park, Fla. “At Interstate we run grain elevators, plus a merchandising program. We are sending money to Chicago every day for margin calls, plus what we are physically paying for the grain. It’s a tremendous pressure that requires having a friendly banker,” Hill says.

Grains traditionally trade on the coattails of each other, and high corn prices have kept wheat and soybean prices good.

“Grain prices are inter-related, says Paul Cameron, a partner in the commodity training firm of Cameron and Crittendon in Charlotte, N.C. Wheat prices and soybean prices can’t lag behind corn too far, otherwise, most of those acres will go to corn, too. I think the wheat-corn price difference could narrow and farmers can do real well growing $5 per bushel wheat,” Cameron adds.

“When we first started seeing corn prices going up and staying up, I think most people in the livestock business thought we should fear ethanol producers. The more I think about it, the more I’m beginning to believe ethanol producers should fear the livestock industry,” says Cameron.

An ethanol producer has a limited amount of money to spend for corn. The meat producer really does not. As long as American consumers can afford to buy meat, the livestock producer will win this battle, Cameron contends.

“The high price of corn will cause livestock producers some short-term problems, but they have the resources to weather the storm. Some livestock producers and food companies may go out of business, but those who survive will come out stronger,” Cameron says.

Despite the high price of corn, the export market remains high. However, if corn prices continue to escalate, it may become viable to bring in grain from South America for livestock feed. The variables are so great in corn right now that we can’t really predict where prices are going. At $4 per bushel, it is not economically feasible to bring in corn from South America, Cameron says.

“In the livestock sector there is not a big gap between the price of livestock on the hoof and in the grocery store. Unlike wheat and bread, where a nickels worth of wheat goes into a $1.50 loaf of bread, the break on livestock is not so big. Unless we get into a real shortage situation, American consumers are not likely to see a huge increase in meat prices,” says Kendall Keith, president of the U.S. Feed and Grain Dealers Association.

King points out that $4 to $5 corn has happened before, but not for a long period of time. “If corn stays at this price, we don’t know what affect it will have on the market, because we’ve never had that situation,” King says.

There is a huge need for information about grain prices and commodity trading. The high value of corn and other grain crops is not necessarily driving this, King says.

He says so many things happening now have no history, and it generates a lot of issues that farmers, grain dealers, bankers, and others associated with agriculture need. Being a part of a professional organization, like the U.S. Feed and Dealers Association is more important than any other time in history,” says King.

American agriculture is in a unique time in history when public demand for carbohydrate alternatives to hydrocarbon fuel is driving the price of grain. Finding the right balance among farmers, livestock processors, grain dealers and ethanol producers will be a pivotal part of how agriculture progresses over the next few years.

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