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08/24/2007

Iowa Farm Chat

I was in Iowa last week, driving around (staring at all the corn),
attending the State Fair, and talking to farmers to try and get a
handle on whether their sector is impervious to the issues facing
the national economy. I feel like I knew the answer heading in,
but the trip confirmed my initial instincts Iowa’s farmers will
suffer if the rest of us do.

But this column will focus on corn and ethanol.

Iowa is the nation’s largest corn grower, about 15% of the
nationwide total 14.3 million acres of corn vs. an estimated
92.9 million acres nationally for 2007; the largest corn crop since
1944. At 176 bushels of corn per acre, that means Iowa will
grow 2.5 billion bushels.

The cost of farmland is increasing. Nationally, it averaged
$1,900 per acre last year, but in Iowa, prime properties are going
for $5,000 to $6,000 per acre these days. I heard of one sale in
western Illinois that was in excess of $50,000 per acre!
Farmland has grown at a 10%-11% pace over the last 15 years
and in Iowa it has been closer to 20%-30% the past 18 months.

[Big Picture the price of farmland is yet another bubble.]

The price of corn on the futures market is currently around $3.50
as I write, having been in a general range of $2.20 to $4.00 per
bushel the past year. Of course the big item fueling the rise has
been ethanol.

The United States currently produces 6 billion gallons of ethanol
and by mid-2009, the figure is estimated to increase to 11.9
billion. Recently the White House and Congress agreed on an
initiative whereby the production target would increase to 36
billion gallons by 2022, though the Senate has mandated just 15
billion gallons of this would come from corn and the other 21
billion from advanced biofuels (of which there is little today) in
an attempt not to disrupt global food supplies. Today, ethanol
consumes 27% of the corn crop, up from 15% in 2005.

[One little side note on corn and food of the 45,000 items in the
average American supermarket, more than contain corn.]

I have previously written much on the topic of ethanol over the
past two years, both good and bad, and you can check the
archives, but I do have to add this bit from a recent Rolling Stone
article by Jeff Goodell.

“(As) a gasoline substitute, ethanol has big problems: Its energy
density is one-third less than gasoline, which means you have to
burn more of it to get the same amount of power. It also has a
nasty tendency to absorb water, so it can’t be transported in
existing pipelines and must be distributed by truck or rail, which
is tremendously inefficient.

“Nor is all ethanol created equal. In Brazil, ethanol made from
sugar cane has an energy balance of 8-to-1 – that is, when you
add up the fossil fuels used to irrigate, fertilize, grow, transport
and refine sugar cane into ethanol, the energy output is eight
times higher than the energy inputs. That’s a better deal than
gasoline, which has an energy balance of 5-to-1. In contrast, the
energy balance of corn ethanol is only 1.3-to-1 – making it
practically worthless as an energy source. ‘Corn ethanol is
essentially a way of recycling natural gas,’ says Robert Rapier,
an oil-industry engineer who runs the R-Squared Energy Blog.”

Of course as you’d imagine, being the nation’s #1 grower of
corn, Iowa also has the most ethanol plants. The biggest single
producer is agricultural giant ADM, which is currently
responsible for about 16% of ethanol production, and,
coincidentally, has contributed $3.7 million to state and federal
politicians since 2000.

Which leads me to just a statement on the current farm bill
winding its way through Congress. It contains $286 billion in
subsidies and half of these go into 20 congressional districts.

Two other items of note from my trip [I’m parceling out further
thoughts in my next “Week in Review” column as well.]

There are 70 commercial wine operations in Iowa! Well I didn’t
know this. One operator told Susan Saulny of the New York
Times:

“I will make as much selling grape plants off of two acres this
year as I did many years on 1,000 acres of corn and raising 3,000
heads of hogs,” said Stan Olson, who makes much of his money
selling cuttings to other aspiring vintners.

Nationally, wine sales rose 5 percent last year to a retail value of
$26 billion. Another Iowa farmer told the Times that his family
cultivates 3,300 acres of corn and soybeans near Des Moines.

“We’re not getting enough value out of corn and beans,” said
Corey Goodhue. “But these grapes, there’s a tremendous market
emerging. On one acre of ground, if we net $40 with corn or
beans we’ve done good. With grapes, you could net upwards of
$1,500 an acre. For us, growing grapes, it’s the holy grail of
high-value crops.”

Lastly, across America the number of farm operators under the
age of 35 has dropped from 16% of all farmers to 6%, according
to the U.S. Department of Agriculture. I had an opportunity to
talk to a number of farmers at the Iowa State Fair about this.
Almost without exception, these 3rd, 4th, and 5th generation
farmers didn’t expect their children to stay in the business.

But there are some in their 40s who are returning to farming,
often with good business skills and some capital, who then enter
niche markets such as raising hormone-free beef cattle, organic
products, or the aforementioned vineyards.

Again, check out my next “Week in Review” for further thoughts
addressing the Big Picture.

Sources: High Plains Journal, Wall Street Journal, New York
Times, Washington Post, Bloomberg News, AP, USA Today

Wall Street History returns next week.

Brian Trumbore



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Wall Street History

08/24/2007

Iowa Farm Chat

I was in Iowa last week, driving around (staring at all the corn),
attending the State Fair, and talking to farmers to try and get a
handle on whether their sector is impervious to the issues facing
the national economy. I feel like I knew the answer heading in,
but the trip confirmed my initial instincts Iowa’s farmers will
suffer if the rest of us do.

But this column will focus on corn and ethanol.

Iowa is the nation’s largest corn grower, about 15% of the
nationwide total 14.3 million acres of corn vs. an estimated
92.9 million acres nationally for 2007; the largest corn crop since
1944. At 176 bushels of corn per acre, that means Iowa will
grow 2.5 billion bushels.

The cost of farmland is increasing. Nationally, it averaged
$1,900 per acre last year, but in Iowa, prime properties are going
for $5,000 to $6,000 per acre these days. I heard of one sale in
western Illinois that was in excess of $50,000 per acre!
Farmland has grown at a 10%-11% pace over the last 15 years
and in Iowa it has been closer to 20%-30% the past 18 months.

[Big Picture the price of farmland is yet another bubble.]

The price of corn on the futures market is currently around $3.50
as I write, having been in a general range of $2.20 to $4.00 per
bushel the past year. Of course the big item fueling the rise has
been ethanol.

The United States currently produces 6 billion gallons of ethanol
and by mid-2009, the figure is estimated to increase to 11.9
billion. Recently the White House and Congress agreed on an
initiative whereby the production target would increase to 36
billion gallons by 2022, though the Senate has mandated just 15
billion gallons of this would come from corn and the other 21
billion from advanced biofuels (of which there is little today) in
an attempt not to disrupt global food supplies. Today, ethanol
consumes 27% of the corn crop, up from 15% in 2005.

[One little side note on corn and food of the 45,000 items in the
average American supermarket, more than contain corn.]

I have previously written much on the topic of ethanol over the
past two years, both good and bad, and you can check the
archives, but I do have to add this bit from a recent Rolling Stone
article by Jeff Goodell.

“(As) a gasoline substitute, ethanol has big problems: Its energy
density is one-third less than gasoline, which means you have to
burn more of it to get the same amount of power. It also has a
nasty tendency to absorb water, so it can’t be transported in
existing pipelines and must be distributed by truck or rail, which
is tremendously inefficient.

“Nor is all ethanol created equal. In Brazil, ethanol made from
sugar cane has an energy balance of 8-to-1 – that is, when you
add up the fossil fuels used to irrigate, fertilize, grow, transport
and refine sugar cane into ethanol, the energy output is eight
times higher than the energy inputs. That’s a better deal than
gasoline, which has an energy balance of 5-to-1. In contrast, the
energy balance of corn ethanol is only 1.3-to-1 – making it
practically worthless as an energy source. ‘Corn ethanol is
essentially a way of recycling natural gas,’ says Robert Rapier,
an oil-industry engineer who runs the R-Squared Energy Blog.”

Of course as you’d imagine, being the nation’s #1 grower of
corn, Iowa also has the most ethanol plants. The biggest single
producer is agricultural giant ADM, which is currently
responsible for about 16% of ethanol production, and,
coincidentally, has contributed $3.7 million to state and federal
politicians since 2000.

Which leads me to just a statement on the current farm bill
winding its way through Congress. It contains $286 billion in
subsidies and half of these go into 20 congressional districts.

Two other items of note from my trip [I’m parceling out further
thoughts in my next “Week in Review” column as well.]

There are 70 commercial wine operations in Iowa! Well I didn’t
know this. One operator told Susan Saulny of the New York
Times:

“I will make as much selling grape plants off of two acres this
year as I did many years on 1,000 acres of corn and raising 3,000
heads of hogs,” said Stan Olson, who makes much of his money
selling cuttings to other aspiring vintners.

Nationally, wine sales rose 5 percent last year to a retail value of
$26 billion. Another Iowa farmer told the Times that his family
cultivates 3,300 acres of corn and soybeans near Des Moines.

“We’re not getting enough value out of corn and beans,” said
Corey Goodhue. “But these grapes, there’s a tremendous market
emerging. On one acre of ground, if we net $40 with corn or
beans we’ve done good. With grapes, you could net upwards of
$1,500 an acre. For us, growing grapes, it’s the holy grail of
high-value crops.”

Lastly, across America the number of farm operators under the
age of 35 has dropped from 16% of all farmers to 6%, according
to the U.S. Department of Agriculture. I had an opportunity to
talk to a number of farmers at the Iowa State Fair about this.
Almost without exception, these 3rd, 4th, and 5th generation
farmers didn’t expect their children to stay in the business.

But there are some in their 40s who are returning to farming,
often with good business skills and some capital, who then enter
niche markets such as raising hormone-free beef cattle, organic
products, or the aforementioned vineyards.

Again, check out my next “Week in Review” for further thoughts
addressing the Big Picture.

Sources: High Plains Journal, Wall Street Journal, New York
Times, Washington Post, Bloomberg News, AP, USA Today

Wall Street History returns next week.

Brian Trumbore