Corn Crazy


From GENE LOGSDON

The commercial corn business, says Sheila Bair of the FDIC, seems to be inflating another one of those hot air market bubbles (my words, not hers). If it bursts, it will leave the financial landscape of the cornbelt looking as forlorn as a field of dead cornstalks. As Otto Doering, a farm economist at Purdue says about the situation in Farm and Dairy newspaper on Nov 11: “We are now at the bottom of the hole and there is nothing that the Republicans or Democrats can do at this point to dig us out quickly. We’re in a hole that we’ve been digging ourselves into for at least 20 years.”

But the farm press blithely says that farmers are having a great year. The price of corn was up to nearly six dollars a bushel last week. A hard- working thief could make $30 an hour stealing corn out of the field at that price. Land to grow corn on (not to mention soybeans and wheat whose markets are also going crazy) is being bid up to $6000 -$8000 an acre while the prices of fertilizer, seed and chemicals are double-digiting upward just as fast. If there is anything rational about this market, food prices, especially meat, must go up significantly. I sure don’t want to be a representative of the people when Americans have to start paying double what they do now for a steak.

Then, last Friday, Nov. 12, corn prices fell the limit. The doomsayers said the long-awaited price plunge was finally under way. This week the price is pogo-sticking up and down all over the floor of the Chicago Board of Trade, mystifying traders themselves and totally bewildering onlookers like myself. What in the world is going on here?

I’ll tell you my crazy corn theories if you will tell me yours. First of all, I think that the situation is similar to the housing market a couple of years ago. Low interest rates encouraged people to buy houses they couldn’t afford and the same thing is happening in the farm equipment and farm land markets. Secondly Asians are learning that they like meat just as much as we do, but how can anybody afford to buy corn to make meat when it is six dollars a bushel even before it gets shipped half way around the world? Thirdly, pension funders, insurance companies, and some billionaires are speculating in the grain market because it looks like a better deal than the stock market. Fourthly, and most importantly, top notch, large-scale farmers think they can hang in there no matter what, not only because of the above reasons but because they have a golden parachute safety net. They are heavily subsidized. The government, as Doering (above) points out, in 1996 shifted from cyclical subsidy payments to direct payments. Instead of paying farmers subsidies on crops when prices were deemed too low to be profitable, Uncle now pays qualifying farmers a subsidy whether market prices are high or low. Then in 2000, Congress re-introduced cyclical payments, calling them counter-cyclical, whatever that means, but left direct payments in place! Even the chairman of the House Agricultural Committee, Colin Peterson, says that’s a mistake and wants to drop direct payments. Fat chance.

Corn is the most wonderful food plant ever developed which is why we start depending on it too much, as the Mayan and the mound-building Mississippian civilizations both did before they collapsed. Corn makes a succulent vegetable on or off the cob, makes cornmeal, hoecake, cornbread, cornpone, mush, batter, popcorn, parched corn and hominy. Now it’s a major source of sugar— high fructose corn syrup. More importantly, corn is the principle animal feed to make meat, milk, cream, cheese and butter. Last but not least, corn makes great beer and whiskey.

So are we happy with our miracle food? No. We had to overdo it. We decided on the ultimate insanity: to feed our cars, trucks, and airplanes with it too. This doesn’t distill out on a large, industrial scale as we are learning the hard way. Ethanol plants are declaring bankruptcy right and left. We will need our land for food, not fuel. Recognizing that fact, a consortium of food industry associations has just petitioned Congress to disallow the recent legislation that permits sales of gasoline containing 15% ethanol instead of the 10% now in effect. Corn is for feeding people, not cars.

We literally live in a corn economy and money speculators are pricing it out of the marketplace. We will either pay a whole lot more to eat or a whole bunch of investors in farm land and grain markets will be wearing empty beer barrels to work instead of suits and ties.
~~

22 Comments

Hello Gene,

I feel like an apology is in order for my comment the other day. It may have appeared flippant, or even disrespectful, considering the earnestness of the conversation. No disrespect was intended, and I actually meant for everybody to “have a great day”. I realize it came across poorly.

In my defense, I should say that here, where I live, it was sunny and beautiful after a couple days of hard rain, and I was excited about working in the sun. After reading your column– which was great– and the comments I got a little bummed out.

It made me realize (again) that no one lives in a vacuum, and despite growing one’s own food, there is no such thing as food security in the larger sense, unless everyone around you is also food secure.

As an aside, I love your books (I own several of them) and your blog. Keep up the Good Work. It is important. Also, don’t post this.

Thanks,
Sal

Jan – I think the last election killed the Food Safety bill (S.510). It has yet to pass the Senate and that apparently won’t happen until the end of November now. Then it has to go to the House-Senate Conference Committee to get a bill that will pass both houses and be signed by the President. I don’t think this can happen before the end of the current session of Congress.

The Republicans take control of Congress with the next session, and they will be controlled by the crazies who recently got elected. The GOP will kill the bill, I think, so food safety hopes will disappear. Big business rules and that’s what the American public voted for in the last election.

Gene,
I think your analysis is way, way off about corn and the reasons for the high prices. Here are some reasons from a non farmer.

1. The true culprit are not the speculators or ag business, but the government itself. The Federal Reserve in particular. Massive money printing efforts are the primary reason why prices are rising across the board even during a deep recession. The FEDs balance sheet has ballooned from 700 billion in 2008 to 2.6 Trillion in 2010 and promises to go at least 600 billion more in the next six months. The reason for this lunacy is because of the massive government budget deficits that cannot be funded any other way. No one wants to buy US Treasury bonds. Thus, the FED must by them!

2. Corn is NOT in a bubble yet. $6.00/bu is no bubble. It only seems high because it has been so, so, so low for last 40 years. One of the primary reasons for farm abandonment has been the extremely low prices for all ag products for so long. The small farmer just couldn’t make it. Even is he could, his children didn’t want to try to make it.

3. I recently read a book on grain speculation by Ralph Ainsworth. It was written in 1934. Still available and worth reading today. Corn in the 1920’s regularly was cheap at $0.50/bu and extremely dear at $1.50/bu. These prices may sound ridiculous, but one must remember we have had 97 years of FED balance sheet expansion and debasement (theft).

At $0.50/$20/oz gold = 0.025 oz gold per bushel of corn

0.025 oz gold / bu corn * $1300 oz gold = $32.50 / bu corn

Transforming yesterday’s corn price into gold and multiplying the today’s gold price by the result yields a “LOW” corn price for today of $32.50 / bushel !!!

4. The above is a simplistic analysis and may be incorrect in some regards. gold might be currently over-priced and corn production is much higher and real costs per bushel are lower today. Thus, I don’t expect $32.50/bu corn. However, this quick analysis highlights these facts:

5. Good farmland prices follow the price of ag products, and need to go higher to prevent suburban sprawl.

150bu/acre * $6.00/bu * 0.20 gross margin = $180/ac

$180 / 0.04 = $4500/acre value

This would seem like a top value for an average acre. Some might be higher if the yield is higher. Ag land near suburban development (I live in such a township) goes for $10,000+ acre.

a. Corn prices are still low today and have room to go much higher. I think we might see $15/bu within the next few years.

However, Even at $6.00/bu in todays dollars, the price of corn would be $0.09/bu in 1929. That would have been preposterously low in 1929 and farmers would have marched with torches and pitchforks on Washington. Now a farmer considers that price immense prosperity.

b. FED inflation is likely to be terrible going forward, and may push nominal ag product prices to silly levels.

c. Eventually, land as farmland may again reach parity with land as suburban sprawl. The former will rise and the latter will fall. At that point, you will see people moving back to land.

Peter Pan’s Dad,

You’re correct. There are two brothers and their wives who operate that way where I live; they farm around 30,000 acres, but I haven’t heard of the outrageous cash rents. Cash rents are high enough, but nothing close to $400. The really wealthy people are land investors, or inherited their land.

Anybody here besides Gene and me familiar with The Whiskey Rebellion? One of the key things to come out of that was the recognition on the part of the Federalist Party that “the people” could and should play a greater part in government (not that it stopped them from passing the Alien and Sedition Acts in 1798, which restricted the right to criticize the government!). But it also drove a lot of people into the arms of the Republican Party, and when Thomas Jefferson was elected in 1800, the whiskey excise tax was repealed. Points of this history lesson being that: corn has been a bone of contention between American farmers and the government for over 200 years; taxation ditto; a lot of farmers sidestepped the economy by making and selling moonshine in spite of the laws against it, because–especially for the western farmers–it was so expensive to ship the grain. So Gershon, I expect that as things continue to get worse, more and more people will do just that sort of thing. What we humans have going for us, despite our seeming collective inability to learn from our mistakes, is the will to survive. Yes, Rome died and was overrun by the “barbarians”, but other empires and civilizations arose and flourished afterward. There is always hope, and as long as there are people like us bucking the system, the seeds of survival will be there.

PeterPansDad wrote: “… here’s to hoping the ATF goes broke and leaves us alone so we can run a still.”

No matter how bad times get, people always have money for alcohol… and it significantly increases the shelf life of something like an apple or pear.

Gershon wrote: “In my opinion… the way to survive is to sidestep the economy. The way to completely do this is beyond the scope of my knowledge.”

It’s simple — in theory, at least: grow your own food and produce your own energy, and distribute the excess to neighbours in barter or cash. And choose to be happy without cheap plastic crap from far away.

(Of course, in practice, this may not be so simple, especially if you’re tied to a mortgaged house that’s too big for your needs which ties you to a job too far to drive to… or if you insist on only doing things that are “legal.”)

Roof,
The large land owners aren’t the big farmers in Illinois. The big farmers own the land under their bins and rent the rest. As I understand it, one nearby farmer is paying double the rent anyone else is offering. He just sends the land owner a letter and a check offering $400-$600/acre for rent and that’s that. He wasn’t born wealthy, I don’t think he’s wealthy now. I can’t believe he makes any money at those prices. I believe it’s a bankruptcy engine. He’ll get what he can, go broke and do it again. Happens all the time out here.

Here’s to hoping small families can pick up the broken pieces. Here’s to hoping they’ll show us all what contrary farming really is. Here’s to hoping they’ll stop standing at their fence envying their neighbor’s land. Finally, here’s to hoping the ATF goes broke and leaves us alone so we can run a still. Darn George Washington!

I’m getting this feeling that the prices of food commodities will collapse and at the same time, the availability will collapse, too. I’m still trying to figure out the mechanism.

It’s becoming fairly obvious the price increase is due to speculators that will neither buy, nor sell the food. They are just hoping to close the position in cash before execution. Eventually, the “Greater Fool Theory” bubble will burst and people will get stuck.

Those who try to close long positions in the commodity market will find they can’t close it in cash and they will be forced to accept delivery. Those who try to close short positions in food they don’t have will be forced to deliver. They won’t have a clue how to close the position except in cash.

I’m thinking of a farmer currently growing 5,000 acres of corn. Because things are good, they borrow money to buy another 5,000 acres at an inflated price using the original 5,000 acres as collateral. When the prices of corn plummet, they will go bankrupt and all 10,000 acres will go out of production.

I’m hoping someone here will illuminate me on the process. However, I’m pretty certain the end result will be a corn shortage and lower prices. But it’s not just corn. It goes across the entire food chain.

It seems like the same thing happened during the depression, but there are more recent, but not so obvious examples.

In 2,000, the dot com bubble burst. As it burst, and the prices of stocks plummeted, many websites disappeared creating a “shortage.” The cost of existing sites also plummeted. Sure, there is still a lot out there, but the content is declining.

With the recent financial bubble with loans for houses being easy to get, rates were around 6%. Now the rates are around 3%, yet they are harder to get as not many qualify.

In my opinion, (I feel like I’m on a soapbox) the way to survive is to sidestep the economy. The way to completely do this is beyond the scope of my knowledge.

This all sounds very doom and gloom. Maybe we are going to hell in a handbasket. A suggestion to those who are feeling smug about having lots of food around: encourage your friends/neighbours/community to do the same. Guess where they will come to when the sh*t hits the fan? (I guess this doesn’t make anyone feel a whole lot better….)

Well, have a great day anyway!

Great insight, Gershon. I agree completely. Those of us older people remember what the Hunt brothers did to the soybean market in the seventies. I remember arguing with farmers back then, and all they were concerned about was they had contracted their beans too early, and didn’t have any at the peak. The fact that it was artificial didn’t seem to matter to them. They told me the Hunt brothers eventually were caught and punished, and I pointed out that apparently they hadn’t been punished enough, because they later did the same thing in silver futures. That’s where the Hunts got hurt.

Another great piece, Gene. We need for people who pay taxes to understand and care where their money goes. The large landowners will always be fine; they were born wealthier than most people will ever be. It’s been a very long time since farming has been a straight up business. I just heard last evening that our congressman had a chance to be on the House Appropriations committee, and opted not to be on it. It’s going to be a ticking time bomb with some of the cuts to be made in the future. A long time ago, you told me that people didn’t want to read about this, and after I had thought about it, I tended to agree. I hope we are wrong. Please keep writing!

It’s a good thing hemp growing in America is pretty much outlawed-just think of what all the growers might do when the bottom falls out of that market!?!?! All that rope making material laying around… anyway-it’s the same ole story-the human condition-the crooks break the law (heck they are even making the laws these days)and the rest of us scramble to try to put the social machine in working order again. We need to diversify the symbols of wealth. Divide and conquer the theifs who run the banking/financial system and get a farmer in The White House next election!

Gershon, I so much agree with you. Well, I agree with all of you. Beth, that is a terrific quote from 1826. Perfect. Cobbett’s “Rural Rides” written about that same time, makes the same point. Deb, yeah, calling the USDA giveaways to rich farmers a “thingy” is perhaps the best way of all to put it. (I love that word, “thingy” for some reason.) I read what you all are saying, I read history, I feel helpless. Humans evidently are not able to do the right thing unless they have no other choice. Or maybe none of us really knows what the right choice is. Oh Lord, maybe there is no right choice. If you read about the fall of the Roman Empire, it sounds like the history of today. Thanks to all of you for commenting. Gene

I went to a workshop given by ?(sorry mush brain)http://journeytoforever.org/biofuel_library/ethanol_manual/manual1-2.html about alcohol as a fuel.This was the norm on all farms till gasoline as a byproduct(waste product) of processing oil started to seem economically viable.Alcohol can be made from yes, corn , but also seaweed,cattails etc.Cars can run on this.It does not pollute.The engines that run it are so clean they last hundreds of thousands miles more.Brazil is already running their cars on alcohol.All cars can currently change to 50% alcohol right now,no change to car.Why don’t we hear more about this?

The whole direct payments sham has made me mad for a long time. Flimsy see-through dress, it is, and the lady wearing it isn’t Marilyn Monroe by a long shot. How that charade could have been foisted and held on the backs of taxpayers this long baffles me, and that bafflement speaks volumes: it’s not our doing, and we have no say in it. Clear-thinking folks wouldn’t let that go on, it’s just insanity plain and simple.

Your crazy corn theories aren’t so crazy. I hope those golden parachute safety nets wrap around the axles and derail that freight train before it takes us all over the cliff with it. Meanwhile, I can feed myself out of a scrap of backyard, and nothing gives me more satisfaction.

Jerry wrote: “Gershon is right – grow your own.”

I agree, but it looks like that might become illegal — at least in the US.

SB 510 will allow warrantless search and seizure of your crops, farm equipment, and even computers if the FDA thinks you are growing “un-approved crops” or using “non-stantard practices.”

I know my raw milk is not on their “approved” list, and somehow I doubt that Permaculture is considered a “standard practice.” Fascism, here we come!

I’m not about to start crying for big agri-business, but with clout like this, predictions of the Beast’s demise are premature, I’m afraid.

Meanwhile, here in Canada, democracy died today, as a ceremonial body appointed by the Prime Minister (the Senate) killed, without debate, climate change legislation passed by elected officials (the House of Commons). All hail King Steven! Or go south, and be forced to grow only “approved crops” using “standard practices.”

The more things change, the more they remain the same. Anyone familiar with “Corn and Currency”, by Sir James Graham? “You have fought for high prices and concurred in measures that render them impossible. You have retained your monopoly, but consented to a change in the value of money, which must destroy its efficacy.” It was written, not yesterday, but in 1826! Like the rest of you, I’m focused on growing my own; the freezer is full, the hay is in the barn, and with the amount of beans and rice I have stockpiled, we could live a long time even if the meals weren’t too exciting. If it gets really bad, there are three pigs and two Angus cows on the place that we could butcher, not to mention the deer, turkeys, geese and ducks. Merle Haggard had it right: “country folks can survive”.

    Sorry Beth, That was Hank Williams Jr. And Dennis, don’t feel too sorry for the large, industrial scale farmer. They were (are) only too anxious to see their neighbor go out of business, or die in order to expand their own operations. These people are, for the most part, economic predators. They are the lean and MEAN survivors of the corporate, industrialist mindset brought to you by agribusiness. A curse on all of them and their corn and soybean deserts! One of the few silver linings of the upcoming economic cataclysm will be the destruction of capital intensive farming. Maybe then we can return to a better rural economy.

I’m feeling a lot better after reading this. I just remarked to myself a few minutes ago, as I entered the house, that we’ve made progress with our garden. It’s good-sized, fenced in, lots of beds, I’ve shoveled kitchen waste in some of the beds, cover crops in other beds, and compost, with a couple compost piles out back, 2 freezers full of food, and several chickens to provide us with eggs. We get our meats from a couple local farmers who graze their livestock. With lots of potatoes and veggies, we can live nicely without relying on corn. At least corn products make up a small part of our food budget.

I feel sorry for the folks who do large-scale (big-dollar) farming. They will be in a world of hurt if this “bubble” collapses. I remember the collapse of the farm economy in the 1980s. That was extremely painful for everyone (except Earl Butz and Richard Nixon). But the big banks and financiers won’t get hurt: they are virtually invulnerable because they own the White House and Congress. Our tax dollars are there to prop them up.

Gershon is right – grow your own. I have always felt that true wealth is a few arable acres and a nice chunk of woods. Food and heat are the essentials of life. If you have your own, the speculators and traders can’t get the best of you.

As I see it, anyone who does not produce something tangible, ie. food, manufactured items, is living on the backs of those who do. I have absolutely no respect for bankers, financiers, loan sharks, speculators and politicians. But for their ability to bamboozle others, they would starve. I fear the time is soon coming when the whole charade will be exposed and we will all, in varying degrees, pay dearly.

I figure the $6 corn is because I pre-bought half the propane we usually use (1.88/gal.) and planned on burning more of the corn we raised and have husked about 3 acres so far. Same thing happened when I signed up to take 1/3 of my IRA when I turn 59 1/2 on Dec.3 and the market started dropping the next day and the value lost a couple thousand in a week. Whenever I think I have a bright idea, just do the opposite of what I do and you should be OK.
If it didn’t go against my anti-religion, I’d put the whole farm in a government subsidy counter-cyclical direct payment thingy, but then the whole ag complex would probably go down the toilet.

This book “World Commodities and World Currency (Benjamin Graham Classics)” was written in the late 30’s or perhaps the early 40’s and the concept shows what might be going on today. Essentially, the currency should be backed by a basket of commodities instead of gold and a person could buy that basket at any time.

Right now, this country is desperately trying to avoid bankruptcy. Fifty percent of our national debt is 5 years or less. If interest rates go up, we are screwed. If they don’t, we are screwed by more inflation while not getting any return on our investments.

As an investor, I see the stock market as seriously flawed. The bond market doesn’t pay anything. Even if I make money, national bankruptcy will take it all.

Now, let’s think about China. Do they continue to buy U.S. debt with their profits from Happy Meal toys? Or do they buy something else that has value.

The something else must be big enough to absorb big money. That’s commodities. Whether they go up or down, at least they get the commodity at some time in the future. And this is the hidden trap.

We make the assumption the average person who goes long a commodity will settle in cash. In 1997, someone quietly went long 130 million ounces of silver contracts. Then in about 2,000 he started demanding delivery. This represented 1 year’s production of silver. When people couldn’t deliver, he leased them silver at nice monthly rate.

Currently, we are making the assumption that those buying food contracts are speculating. But what if China quietly accumulates a trillion or two in long contracts, and then demands delivery when they see the dollar failing?

Money only has value as a share of a country’ future production. The futures market the only place one can seemingly be confident of buying future production at today’s prices. With interest rates essentially zero, the interest cost of carry is essentially zero. With the big numbers from China and other countries, it would be simple enough to buy an entire year’s production of food and demand delivery, leaving us nothing.

The antidote is simple. Plant a garden and grow our own food. This is essentially free for a person who already owns the land and is watering grass.

For the small farmer, I’d focus on the organic local market. It would be quite a sales project during the winter, but I think people could be convinced to participate in a CSA type of arrangement. They could deposit say $400 at the beginning of the year, and subtract what they buy from the total throughout the growing season at organic store prices. I’d work with the people to get an idea of what they want to buy, and maybe even arrange for a weekly deliver for some fee.

For the big farmer, I don’t have much hope. The system seems to be breaking down and everything is working against them.

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