Biofuels and Farm Prices

The chart above shows the price of corn on the right scale (data from the USDA), and the fraction of the US corn crop convertible to ethanol by the capacity of ethanol plants in production on the right scale.  Obviously, biofuels are not the only influence on corn prices, but clearly it's likely to be the main influence behind the price spike in 2007-2008, and also why prices have continued to be above the historical levels through the worst recession since the great depression (in late 2008 and 2009).  An excellent thing for grain farmers.

Not so great for livestock farmers, or eaters, though, since the corn crop was previously mainly used for animal feed.  This next chart shows the changes in the price of corn, but also hogs and milk, with all three series rescaled to 1.0 in January 2000.  As you can see, while the price of corn spiked, the price of animal products did not climb to the same heights, and fell to the low end of the historical range during the great recession.

So the ratio of animal product prices to corn prices, which obviously is a key thing if you are an industrial livestock farmer, reached very low levels in 2008-2009:

Unfortunately, feed is the single largest cost input for livestock farmers. For example, looking at the cost input data for milk, which only goes through 2008:

You can see that once milk prices went down with the recession, but feed prices fell much less, these guys were doomed.  Sure enough, if you google "dairy bankruptcy", you can find lots of stories like this:

The filing for bankruptcy protection Thursday by the largest dairy in Weld County is a sign of the times for the industry, a Colorado State University specialist said Thursday.

Johnson Dairy filed for Chapter 11 bankruptcy protection in a Denver court. According to the Rocky Mountain News, the company east of Eaton listed debts between $50 million and $100 million and assets of less than $50 million. John Johnson was not available for comment, but an official with the New Frontier Bank of Greeley, which partially finances Johnson, confirmed the filing.

Bill Wailes, the head of the animal sciences department at CSU and a dairy specialist, said Johnson’s move is a sign of the condition the industry presently finds itself in. There is not much of a chance for improvement on the immediate horizon, he said.

or this, in my own county:

Joseph “Joey” Mendoza walks slowly through an empty milking barn at his 150-year-old dairy down the road from the Point Reyes Lighthouse.

Mendoza, 65, a third-generation dairyman, sold his 489 dairy cows three weeks ago as part of a national program that seeks to ease what many are calling the worst milk crisis in 70 years.

More than 100,000 cows were sent to slaughter under a program developed by the National Milk Producers Federation. Milk prices remain depressed, and program officials recently announced another “herd retirement” that seeks to remove roughly 100,000 more animals from milk production by paying up to $1,500 per cow.

For Mendoza, whose grandfather came to the Point Reyes area to milk cows at the turn of the last century, the decision to sell his Holsteins was especially painful. He called it necessary to pay off creditors and to stop the months of financial losses caused by high feed costs and low milk prices. Those prices seem tied to a slump in exports.

Eventually, enough dairy farmers will got out of business that the remaining ones will have the pricing power to pass the higher cost of feed through to consumers.