Drought 2012: Hot Weather and Hot Grain Markets

It's only August, but talk early harvest of corn and beans is under way. Louisiana is 11 percent harvested on the beans, Mississippi is 6 percent done.

USDA issued the first harvest report, saying that we were 4 percent done Sunday night.

The early harvest might be contributing to the old-crop/new crop spreads. Early in the rally, the nearby contracts led the markets. Recently, it has been the December corn contract.

With early harvest taking the pressure off the idea of running out of corn, we can now just worry about the new crop. At some point we will wonder if the carryout is still too high because we used some of the current crop up before the current crop year officially started.

The highs in corn prices have has a lot to do with ideas of limiting demand. Not much talked about by farmers, but noticed by the trade is the unusual importing of corn taking place right now.

Southeastern feeders have banded together to get Brazilian corn into Norfolk. Nine cargoes were booked more than a month ago. This month, the talk was of Brazilian corn coming into California for the dairy industry concentrated there, away from our mainstream supply.

It's sad to think that ocean freight from Brazil can be cheaper than rail freight from the Midwest.

The government has stopped just posturing about the ethanol mandate. The EPA has now officially opened a 30-day period for comment on whether the mandate should be waived. This would mean that refiners would not be required to put 10 percent ethanol in their gasoline blends. The consensus is that if the mandate is suspended, corn prices would drop as usage in gas would drop. 

If the mandate changes and the refiners go to less ethanol, the result would be the total stop to the rally and a retracement, looking for a demand-driven price.

Some time in the future we will look at the charts and have reasons why prices changed at a certain date. What we know is that the prices cannot just go up.

Drought 2012: Stokes the Food As Fuel Debate

The U.S. government requires about 13 billion gallons of ethanol to be used in the nation's gasoline. To achieve this, nearly half of the nation's corn crops go to not feeding people but to powering motor vehicles.

Since 2005, the U.S. government has mandated that gasoline contain ethanol, mostly derived from corn. The policy intent was to reduce dependency on foreign oil imports and improve air quality. It has also been a boon for corn farmers.

But in the midst of the worst drought since 1934, the faults of this policy that forces nearly half the U.S. corn harvest into fuel production. And with corn prices at record highs, the ethanol requirements are fueling increased food costs and spreading it to the price of gasoline, which is up almost 40 cents a gallon since early July.

Beef and pork ranchers are slaughtering their herds at a record rate to cut their corn feed costs which have gone up more than 30% in three months. As a result, U.S. cattle herds next year are projected to be the smallest since 1952, a guarantee of more expensive food in years to come.

Th drought exposes the notion of trying to expand an industry where the economics of it don't make sense. Based on its energy content, ethanol is approximately 50% more expensive than gasoline and the acreage required to produce it distorts land prices.

Tractors run on diesel fuel that plow the fields, plant seed, harvest the crop and haul it to refining plants. Ethanol is also highly corrosive and can’t be transported by pipeline, unlike oil. Trucks or trains must carry the finished product to gasoline blenders. In short, ethanol requires more energy to produce than it actually yields, negating the environmental benefits.

Earlier this month the United Nations Food and Agriculture Organization issued a statement urging "an immediate, temporary suspension" of America's use of corn to produce ethanol, in order to "allow more of the crop to be channelled toward food and feed uses."

Natural disasters can't be controlled, but ethanol is a man-made disaster that needs to be stopped.