Hofstrand also addresses the cash rent level, which he says will go higher, helped by the crop insurance revenue payment levels, “The current generous revenue insurance program reduces the need for a risk premium in the profit structure of corn production, allowing corn farmers to bid cropland rents even higher. So, the higher corn prices generated by the corn ethanol industry are, or will soon be, fully capitalized into the corn farmer’s cost structure.”
Impact of Ethanol
Due to the reliance of the corn price—and farm income—on the ethanol industry, Hofstrand says any decline in that industry would be felt beyond the profitability of corn growers. He says the expansion of corn acreage is attributable to the ethanol industry, and such expansion has caused prices of other commodities, such as soybeans and wheat, to rise to maintain their acreage base.
And he adds, “To maintain their acreage, the selling prices of other crops have also risen to be competitive with corn. Higher prices for these other crops means improved profits for a large number of non-corn farmers. If the demand for corn ethanol drops, the demand for corn will also drop, reducing the competition for acres and causing a price drop for other crops. This will result in a cost-price squeeze for growers of corn and other crops.”
Corn production costs are rising, and while it will be less than 2012 on a per bushel basis, current costs and commodity prices will put many producers in a cost-price squeeze. Higher input costs, including machinery expenses and cash rents, will push the cost per bushel into the mid-$4 range for 2013. Higher prices for corn, resulting from ethanol demand, have caused other commodity prices to rise as well, and any decline in the ethanol industry will negatively impact the profitability of soybeans and wheat, as well as corn.
Source: FarmGate blog