Are We In The Middle Of An Ethanol Bubble?

Farming

The 2007 U.S. energy bill mandated that a total of 15 billion gallons of renewable ethanol must be produced by 2015. Because of this, demand for corn has skyrocketed, and the impact of that market distortion has been felt across the crop markets. It’s not just corn prices that have soared, but as farmers have ramped up corn production to meet demand they’ve shifted away from other crops, diminishing supplies and driving up prices for those as well.

Now comes news that farm land values are spiking. Here in North Dakota farm values jumped an average of 46% in 2012, and land values have more than doubled since 2009. In other parts of the country farmers are saying that land is overvalued, and that we’re in the midst of a bubble.

It’s hard to disagree with that position, especially when the only impetus we can point to for this dramatic increase in crop prices and farm land values is the distorting impact of the government’s ethanol mandate.

And we have precedent for the distorting impact of that sort of policy. The federal government’s mandate for subprime lending led to the housing bubble. The government’s mandate for student loans has created a higher education bubble. Why wouldn’t we believe that the government’s mandate for ethanol would create an agriculture bubble?

Bubbles are the sort of thing that happens when something is produced and sold not because of market demand but because of government policy.

For North Dakota, the meaning of this bubble is significant. The Bakken oil boom may have been making headlines these last years, but agriculture remains the state’s biggest industry. With the oil boom seeming to plateau, and the state’s agriculture industry in the midst of a bubble, North Dakota could be headed for some difficult times.

Rob Port is the editor of SayAnythingBlog.com. In 2011 he was a finalist for the Watch Dog of the Year from the Sam Adams Alliance and winner of the Americans For Prosperity Award for Online Excellence. In 2013 the Washington Post named SAB one of the nation's top state-based political blogs, and named Rob one of the state's best political reporters. He writes a weekly column for several North Dakota newspapers, and also serves as a policy fellow for the North Dakota Policy Council.

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  • Jonesy

    A contributing factor for the run-up in farmland prices are the east coast finance/investment firms. They’re buying up farmland in the midwest and running up prices. One could argue that the reason they’re doing this is because they knew the prices would be supported by the government mandates/subsidies. Farmland is kind of like oil to the investment firms. They know that people need them, so they’ll run up the price as high as they can until it busts, even if that means stockpiling oil to create an additional false demand (similar to the diamond industry….. I hope that breaks soon).

    • camsaure

      Agreed, But not to forget the printing of money/inflation makes land a better investment.

  • toomuchguvmint

    There are several other obvious and relevant facts that need to be part of this discussion. At the beginning of the past decade the government was guaranteeing a minimal amount of gross revenue per corn acre grown. Now many farmers receive a revenue guarantee of close to $1000 per acre of corn grown. Also the government was paying a minimal amount of insurance premium per acre. Now it is many billions per year. Some farmers now receive over a million dollars every year as a benefit towards the cost of their government crop insurance premium. Also the national debt has nearly tripled since the beginning of the last decade.

    • Jonesy

      “Some farmers now receive over a million dollars every year as a benefit towards the cost of their government crop insurance premium.”
      Dalrymples

  • toomuchguvmint

    A vivid example of the lethal impact on smaller farmers of congress targeting the largest farmers with multimillion dollar investment/profit guarantees is the debacle occuring now in sw Michigan. Bankers eager to cash in on congress’s open ended crop insurance guarantees engaged in pedal to the metal lending with a 40,000 acre plus farmer named Mike Stamp. In order to grow his operation to this size a large number of smalller farmers were outbid by Mr. Stamp for rental land and were forced to downsize their farming operations. This past year Mr. Stamp was one of three finalist for Top Producer’s Top Producer of the year award. Before the year ended Mr. Stamp had filled for bankruptcy. If congress was not engaged in this insane pedal to the metal investment/profit guaranteeing business to the largest farmers, smaller farmers would have been most likely able to hang on to their operations. Internet search engines provide many details of the ongoing bankruptcy and the numerous small farms and farm input suppliers being hurt by this action by congress providing multimillion dollar benefits to the large farmers such as Mr.Stamp. Lenders would not be engaged in such extremely reckless lending practices if not for the .massive investment/profit guarantees by congress to one individual.

  • toomuchguvmint

    Another narrative of how congress is destroying smaller farms with nearly unlimited investment/profit guarantees for some of the largest operations is documented with the following link.http://www.agweb.com/farmjournal/article/high-profile_crash_of_a_titan/

  • Edd

    There are a couple of factors behind the dramatic rise(bubble) in ag land prices. One is the ethanol mandate creating more demand for corn then there otherwise would be. Second is the price/revenue guarantee from a 60% premium subsidy in crop insurance, and third locally we have had large crops with the high prices to fill the cash accounts of farmers. But as always happens, farmers are their worst enemy, and by bidding up machinery, and land they are squeezing the profit out again. The input sellers like Monsanto are more than happy to double the price of inputs when they see gross revenue increase. Unless prices go up to $8 corn, and $15+ soybeans, I foresee land dropping $2-3,000 in the next two years.

    • lucas

      as a young farmer with just under a decade of experience I obviously dont have all the answers,but Edd is 100% right on this. those that argue for high insurance subsidies say that we are ensuring a stable food supply by keeping farmers afloat during the bad years, and there is some truth to that, however where do we draw the line between ensuring a stable food supply and subsidizing stupidity? As with all things that government gets involved in it seems to make matters worse, by subsidizing risk the government has actually produced more of it because it is not the individual irresponsible operator on the hook for unpaid bills it is the taxpayers that get hung out to dry. and just like the wall street fat cats that lined up in droves to receive their bailout when their poor decisions led to the destruction of their businesses, farmers big and small will line up with palms wide open to accept their taxpayer funded bailouts at the fist sign of dry weather, or wet weather, or it’s too hot, or too cold, or it hailed, or prices fell, or a myriad of other excuses. Roughly estimating the average size farm receives around $40,000.00 in crop insurance subsidies naturally the more acres farmed the greater the total subsidies and it is also those large farms that are working on volume that and driving rental and land rates sky high while raking in the free risk that the government hands out. i believe with either need to drastically reduce the amount of subsides for crop insurance thus making producers have a little more skin in the game or start taxing the received subsidies as benefits or other compensation. yes these changes will hurt my operation as well but i truly believe it is unethical to ask a country that is 16 trillion in debt to gamble on my decision making skills. risk subsidies are a luxury when the country has the money, but we don’t and times have been good in the ag sector shouldn’t that be grounds enough for making us stand on our own two feet?.

      .

  • Thresherman

    If ethanol was the only issue, land prices would not be surging outside of corn growing areas. Yet we are seeing farmland go up in areas that produce wheat, barley sunflowers and canola. Sunflower prices have been going up due to the domestic demand of sunflower oil exceeding the amount produced. Much the same for canola and a rising world market for wheat has driven the price up on that as well. So isn’t just ethanol, there has been a sea change in the entire spectrum of crop production.

    • toomuchguvmint

      The more acres grown to corn for ethanol worldwide the fewer acres that are available to plant to these other crops. Less acres planted often mean higher prices for these other crops.

  • Lynn Bergman

    Anyone who keeps up with the news is aware that land values on the great plains have, for a couple years, been predicted to plateau beginning right about now. The main reasons it has been a predicted phenomenon involve the advanced average age of farmers and the lack of adequately capitalized young farmers, resulting in an imbalance in the supply of and demand for land. Not enough young farmers are bidding on land and the economy of scale has limits for existing farmers, preventing them from bidding on estate land in some cases.

    Corn prices have everything to do with last year’s drought and very little, if anything, to do with demand for corn to satisfy the demand for ethanol. An expected better crop in 2013 is already depressing corn prices and will continue to do so… unless the unlikely event of a second straight year of major drought. Recent indications are that the drought cycle experienced last year may have run its course.

    An ethanol glut occurred during 2012 because of the END of subsidies (to gasoline blenders, not ethanol producers) for corn ethanol on January1, 2013. Gasoline blenders stocked up on ethanol during 2012 and also stored it for later sales, so the price of blended gasoline went down considerably for a time (thanks, ethanol). The supplies of ethanol have since been depleted so the price of gasoline has risen and the price of ethanol along with it. Corn ethanol now stands on its own value and has become profitable again during the first quarter of 2013.

    CORN ETHANOL SUBSIDIES ARE OVER… and have suceeded in:

    Replacing MTBEs, known carcinogens.

    Lowering the price of gasoline.

    Lessening the need for crude oil imports from the middle east.

    Created thousands of jobs.

    Please focus on the extended subsidies for cellulosic ethanol, which truly is one of the worst ideas in decades. The handling problems will never be overcome.

    Corn ethanol is here to stay.

    • toomuchguvmint

      Washington, D.C. – The Environmental Protection Agency’s latest proposal to pump even more corn ethanol into the gasoline supply this year signals the need for a major overhaul of U.S. biofuels policy, said Environmental Working Group’s Vice President for Government Affairs Scott Faber.

      Under the proposal published today (Feb. 7), EPA would increase the amounts of biofuel that must be blended into vehicle fuels under the federal program known as the Renewable Fuel Standard, or RFS. The RFS mandates the blending of both conventional biofuels – corn ethanol – and advanced biofuels, including soy biodiesel and fuel made from plant materials, sugar and even municipal waste. In 2013, blenders would be required to use nearly 14 billion gallons of corn ethanol, which amounts to more than 80 percent of the overall biofuels mandate.

      With U.S. demand for gasoline shrinking and advanced biofuels still commercially unavailable, the requirement will divert more food and animal feed to make biofuels, Faber said, harming consumers and forcing farmers and livestock producers out of business. Flooding the market with corn ethanol also risks damaging engines that can’t run on higher ethanol blends while worsening the impact of corn production on the environment, he added.

      EPA’s proposed requirements come on the heels of a recent decision by a U.S. Court of Appeals that overturned the 2012 mandate to blend more than 8 million gallons of cellulosic ethanol. The court said that mandate was based on unrealistic production forecasts. No cellulosic ethanol is currently being produced in the U.S. on a commercial scale. Despite the ruling, EPA has proposed an increase of the cellulosic mandate for 2013 to 14 million gallons, citing an expected uptick in production from new facilities in the Midwest.

      “Enough is enough,” said EWG’s Faber. “Pumping more corn ethanol into an already saturated market hasn’t helped address our energy needs, nor has it spurred development of advanced biofuels; in fact, the opposite is true. The corn ethanol mandate hurts families struggling to pay their grocery bills, stifles competition and wreaks havoc on our rivers, lakes and streams. It’s a raw deal for consumers, motorists and taxpayers, but a boon to a handful of special interests. Until the Renewable Fuel Standard is reformed, Americans will continue to suffer the consequences of this misguided policy.”

      EPA’s proposal is open for public comment until March 25, 2013. It can be found here:

      http://www.epa.gov/otaq/fuels/renewablefuels/regulations.htm

    • toomuchguvmint

      If all USA crop acres were grown to corn for ethanol the ethanol extremists would still be claiming that food prices are unaffected. I guess the recent doubling or tripling of food prices is still not providing enough income for the greediest producers among us. Yet these same people make the same absurd claim that diverting 40% of the corn acreage to ethanol production is not affecting food prices.

    • Zog

      Then God help the USA because the market distortion and subsidies will create a disaster in agricultural economics.

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