Tuesday, March 27, 2007

The Best of Intentions

Cornfield Near Aurora, South Dakota
The corn fields around the Verasun Energy plant near Aurora, South Dakota look dry. Irrigation equipment stands idle as the last remnants of a late snow storm melt under the March sun. In a few months I wager that equipment will be pumping streams of ground water onto row upon row of corn plants.
Farmers across the country are gearing up for the 2007-2008 planting season. They are scrutinizing the weather forecasts, checking farm equipment and calculating fertilizer and seed requirements. Most years farmers might have some ambivalence about their crop plans if the year is shaping up as a dry year with no rain. However, this year farmers see only the price of corn at $4 dollars and change per bushel.
That is why Allendale, Inc., a commodities brokerage and research firm based in Illinois, is reporting record results from their annual “planting intentions” survey. The good folks at Allendale say corn planting intentions for the 2007-2008 year are at the highest level since the end of World War II. Farmers responding to the survey say they are planning to put in 90.8 million acres of corn this year, 12.3% higher than last year. Allendale believes this acreage could produce 12.6 billion bushels of corn.

Where is all the new corn acreage coming from? Some farmers are shifting crops. Soybean intentions are down 10%. Others are bringing fallow land back into production. This is likely marginal land in the first place, left untilled because it is relatively unproductive. Some have even proposed the elimination or reduction in the Conservation Reserve Program (CRP), which gives agriculture landowners annual rental payments for land planted in resource-conserving vegetative covers. In South Dakota the CRP has been a significant contributor to increased populations of pheasants (the state bird) and cottage industry of
hunting lodges and tours.

The corn production dynamic appears to have been altered at least for the time being if not permanently. At current prices, it is possible for farmers to produce corn on marginal land requiring high inputs of fertilizer and irrigation water particularly under adverse weather conditions. The environmental watch dog group,
Environmental Working Group, estimates that even under average farm production levels as much as $330 million of nitrogen fertilizer is flushed down the Mississippi River each spring.

There are far reaching environmental consequences to the use of corn for alternative energy that have not, I fear, been factored into the price of ethanol. At $4.00 and change for a bushel of corn, those concerns are cast aside by farmers with the “best of intentions.”

Neither the author of the Small Cap Copy web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

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