As The Economist duly notes, corn-ethanol subsidies for farmers expired on December 31. Few have prepared adequately for the shock.
There are, fortunately, other offsets for farm owners. With the E85 initiative, most new motor vehicles sold in America are being made to burn E85 gas fuel, which blends 85% gasoline and 15% ethanol. Historically, the blend has been lower, at only 90%/10%. Since the E85 initiative began in the early 2000’s, the U.S. has become the world’s largest fuel ethanol producer, and in May 2011, the US Department of Agriculture (USDA) began providing financial assistance, via grants and loan guarantees, to fuel station owners to install E85 and blender pumps. These moves should offset the loss in demand from the corn ethanol subsidy withdrawals.
The current generation of ethanol facilities is also more efficient, and has a greater use of by-products (in terms of supplemental revenue streams), which will work to counter the withdrawal of the subsidies.
For many, there is also a fundamental belief that demand for staple farm grains is going to remain strong. For a variety of reasons, including cultural changes in places such as China, this may well be true. Last year, for example, we saw a number of instances where when corn prices dropped (perhaps in contemplation of the ethanol subsidies being withdrawn), China and other foreign countries made historically high purchases of corn from farmers in the United States. Our expectation is that this trend will continue through 2012.
Most of our funding sources seem to have a fundamental belief that food prices are going to stay fairly strong — no one thinks corn is going to go down to $2.00 or $2.50 a bushel and stay there. Further, we’ve seen some major funds with farm-related investments committing to double their portfolios in the upcoming year. They are bullish on staple farming operations, and so are we.
Because of this, we believe the odds are high that prices for corn and other farm-related products will be reasonably stable in 2012, without the wild fluctuations that some are predicting.
Dustin Watkins is a Senior Analyst at Wall Street Strategic Capital, Inc., a strategic financial advisory firm that arranges non-traditional debt financing including asset-based farm loans, bridge loans, and contract financing.
