Does Ethanol Benefit Farmers?

Column for week of May 26, 2014

     The diversion of 40 percent of US corn production into
ethanol greatly increased the demand for corn and the price of
corn.  It may seem obvious that this has made farming more
profitable.  A closer look is warranted.

     The sudden increase in corn prices and the ripple effect
increase in prices for other crops did substantially increase
farmers' profits.  Will this increase hold up?

     The value and price of resources used to produce any
product depend on the value and price of the product produced. 
Farm land in one of the main resources used to produce crops. 
With more money to spend farmers and farm land investors
quickly bid up the price of land.  This gave farm land owners a
big boost in net worth.

     It is important to distinguish between income from
farming and income from owning farm land.  The non farming
land owners gained as much from the increase in land prices as
did farmers who owned land.  For farmers who didn't own the
land they farmed the cost of renting or buying that land went up. 
All they gained was a brief boost in profits while the price of
farm land caught up with the higher crop prices.

     The initial crop price increase made it profitable to farm
land that was not being planted.  As this land comes into
production it moderates the initial crop price increases.  The
initial bubble in crop prices cannot be sustained without some
new factor pushing prices up.

     Once acres planted and the price of farm land fully
adjusts to the higher crop prices, profits from farm operations will
drop back to their former levels.  The only sustained gains will
be the increased land values.  The higher values of farm land
will benefit those who sell or rent their land for higher prices.

     Owners who farm their own land in effect rent their land
to themselves.  The benefit to them will come from owning the
land, not from farming it.  These farmers could capture the same
gains by selling their land.  All that they would lose by selling
would be the profits from operating the farm.

     Some may say the ethanol boost in crop prices is still a
good deal for farmers.  Some gained and the rest are no worse
off than before.  We still haven't seen the end to the story.

     Ethanol production is inefficient and wasteful.  It exists
only because government forces people to buy ethanol and
subsidizes production with tax dollars.  Ethanol production is an
artificial bubble.  Such bubbles are always in danger of bursting.

     When the ethanol bubble bursts crop prices will crash and
farm land values will crash with them.  Farmers and all farm land
owners will then pay for the profits gained during the inflation
of the ethanol bubble.

     Farming and farm land ownership will be disastrously
chaotic until a new equilibrium is established with lower crop
prices and lower farm land prices.  The economic pain from the
readjustment is likely to exceed the then nearly forgotten benefits
during the inflation of the bubble.

     The ethanol blessing to farmers will end as a curse for
most who fail to sell their land before the bust.  Those who
didn't increase their debt because of the higher land values may
ride the bubble up and down without great loss.  They won't
gain either.

     It is anybody's guess when the bubble will burst.  Some
may believe it never will.  I'm not betting that they will be right. 
History isn't on their side.

     Whatever happens the ethanol bubble will cast a dark
shadow over the entire agricultural economy until the bubble is
deflated.  It will be much like living on the side of a volcanic
mountain waiting for the eruption.  This seems like a high price
to pay for a few years of mostly false prosperity.

     In the end all higher crop prices accomplish is to increase
the price of farm land.  Once the adjustment period is over,
farming is no more profitable than before.

aldmccallum@gmail.com
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Copyright 2014
Albert D. McCallum