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Market-based set-aside

September 7, 2016 - David Kruse
First I have to start out by correcting a mistake that I made in the last column when I said that LDPs were a thing of the past, no longer included in the current farm bill. I got a call from a subscriber in Kansas telling me that there were LDPs being paid on wheat in Kansas. The loan rates of corn and soybeans are set so low that there should be no LDPs on those crops.1 I was told that I left the Pro-Farmer Crop Tour (Aug. 24 in Spencer) gathering a bit too early and missed a good exchange. One of the attendees brought up “his perceived need” for a 10 percent set-aside given burdensome grain stocks. He was reportedly shot down by the host Chip Flory who broke out in a sweat energetically arguing against the concept. I thought that we had all outgrown the futility of set-asides, but I guess not. In a global economy, set-asides are functionally failures. If we set-aside acres in this country presumably subsided by U.S. taxpayers, they would grow more wheat in Canada, Russia and Ukraine, more corn in Ukraine, Brazil and Argentina, more soybeans in Brazil and Argentina, and more cotton in Uzbekistan and Australia. We would reduce our acres so that global competitors didn’t have to. I am sure that Russian wheat farmers, Ukraine corn producers and Brazilian soybean farmers would be extremely grateful, but it would do little of anything to help the market in the long run and cost U.S. taxpayers money for unjustifiable subsidies. It essentially subsidizes foreign production. There will be a set-side, but it will be decided by the market. The high cost producers will reduce acres. That’s the poor marginally unproductive land and the poor souls voluntarily or involuntarily paying $300 to 400 per acre cash rent. We reduced wheat acres in 2015 and grew more corn and soybeans. What are we going to plant next year? We grew fewer acres of wheat, but the wheat carryover ballooned anyway from high yields enough so to produce LDPs in Kansas. So we plant several million fewer acres of wheat again this next year? What to do with those acres? We will need fewer acres of corn next year, too. How cheap will soybeans get if we plant all those acres to soybeans? The market and economics will dictate the set-aside. The other half of the “low prices cures low prices” rule is that new demand discovery has to take place. Who can make money with sub-$3 corn that will add to demand? Livestock producers have their foot on the production accelerator even as burdensome meat/poultry stocks are pushing on the brakes. Livestock profits are being compressed despite low feed costs. Exports are great and growing, but they are not going to turn sub-$3 corn into $4 corn and both our major party presidential candidates oppose TPP. La Nina’s a dud. It is hard to get cold water in the Pacific in a record warm world. Foreign grain and oilseed competition has not slowed because of low prices yet, in part because of the currency advantages of those producers. How about ethanol? Margins are great so ethanol plants will run at capacity, but no one is building new ethanol plants because of limits on market access to consumers. Auto companies are not building as many flex-fuel vehicles as they should or extending warranties on vehicles for higher ethanol use as aggressively as they need to. I use E-30 in my non-flex fuel Dodge. I wished I had stuck around for the debate at the Pro Farmer Tour meeting as I would have interjected that farmers need to lead the way on ethanol demand. A couple of years ago I spoke to an ethanol group of a couple hundred farmers who were ethanol plant shareholders/investors. I asked them all to stand and then said that those using E-85 could sit down. A number of them did. Then I said that those using E-30 could sit down. A few more did. I repeated the request with those using E-15. In what was a surprise to me, an unmistakable majority of the farmers at the meeting were still standing using only E-10. These were corn farmers and ethanol plant investors for gosh sakes and they were only using E-10. They give you every excuse in the world why they do not use their own product, but they are all lame. The ethanol plant’s board was surprised at the lack of ethanol consumption in the room. So some farmers would rather have a set-aside or get an ARC or PLC payment from taxpayers than use their own product — ethanol. E-10 consumers are part of the petroleum industry’s blend wall. I think that farmers who do not use higher ethanol blends do not deserve farm subsidies. I take my analogy out of the Corn Belt to cotton farmers in the south. If you opened the closet of a Texas cotton farmer, who has taken a lot of subsidies, and found that just 10 percent of the clothes in that closet were cotton with the rest being rayon and microfibers you may think that farmer is nuts and ungrateful taking subsidies while not buying his own product. I don’t see corn farmers who use only E-10 as any better than my make-believe cotton farmer. If we could increase ethanol consumption overall by 1 percent of total fuel demand, which is the equivalent of a roughly 10 percent increase in ethanol consumption, we would use another 527 million bushels of corn. We need that demand — unless you like cheap corn and subsidies. Before we start talking set-asides or the need for another farm bill, use the d%#M ethanol from the product you produce. We need government for certain things, but why not do all we can ourselves? Start with more ethanol.

David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.

 
 

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