Dow Jones writer Bill Tomson reported yesterday that, “U.S. farm net income will reach a record level of $87.1 billion in 2007, a substantial $28.1 billion increase from 2006, the U.S. Department of Agriculture predicted Thursday.

“Quick growth of corn-based ethanol production in the U.S. is a major component of rising net income, according to the new forecast, which also factors in government subsidies. The report was released by the USDA’s Economic Research Service.

“‘The rise in prices of grains and oilseeds due to the demand from the rapid expansion of ethanol production could result in a record corn crop and record cash receipts for crops,’ the report said.”

And Bloomberg news reported this morning that, “U.S. net farm income in 2007 will be 48 percent greater than a year earlier, and more than forecast in February, as higher grain and livestock prices offset increased production costs, the government said.”

The article indicated that, “Cash expenses will rise 8.5 percent to a record$222.6 billion, and gross cash sales will jump 16 percent to a record $276.4 billion, the USDA said.

“The value of all U.S. crop production this year is forecast to rise 14 percent to $136.2 billion from 2006. The value of production from cattle, hogs, chickens and eggs will increase 18 percent to a record $140.2 billion, the USDA said.

“The average price of corn, the nation’s biggest crop, is 62 percent higher this year than a year earlier, and soybeans, the second-largest crop, are 36 percent higher. Wheat prices, which reached a record high Thursday, are 46 percent higher on average than a year earlier.”

The ERS report, which can be viewed by clicking here, also noted that, “In 2007, average farm household income is projected to be $86,693, up 8 percent from 2006. Both the average farm and off-farm incomes of farm households are expected to be higher than in 2006.”

With respect to government payments, ERS indicated that, “Direct government payments are expected to total $13.6 billion in 2007, down from the $15.8 billion paid out in 2006. This level would be nearly 17.4 percent below the 5-year average.”

“Countercyclical payments are forecast to decrease from $4.0 billion in 2006 to $1.1 billion in 2007. This follows a small decrease in 2006. Of the 2007 crops, only upland cotton and peanuts are expected to receive payments. This continues 2006 trends. This is quite a change from previous years, when more than half the payments for 2004 and 2005 were to corn and a quarter of the payments were to cotton.”

“Marketing loan benefits—including loan deficiency payments, marketing loan gains, and certificate exchange gains—are projected at $1.1 billion in 2007, down from $1.8 billion in 2006. In 2006, upland cotton producers and corn producers received 62 percent and 24 percent, respectively, of total marketing loan benefits. Since upland cotton marketing loan benefits are expected to decline only 8 percent, upland cotton producers may realize 97 percent of the total marketing loan benefits in 2007.”

A complete table containing federal farm payment information from 2003-2007 can be viewed here.

And, the report also added that, “Conservation programs include all conservation programs operated by the Farm Service Agency (FSA) and the Natural Resources Conservation Service (NRCS) that provide direct payments to producers. Estimated conservation payments of $3.1 billion in 2007 reflect programs being brought up toward funding levels authorized by current legislation.

“Ad hoc and emergency program payments are forecast at $2 billion. Although this would be an 629-percent increase over 2006, it is only 13 percent above the 5-year average. Ad hoc and emergency program payments include all programs providing disaster and emergency assistance to farmers. The carryover of payments from 2006 has been lower than expected. Further, much of the payments for major crop damage from drought in 2007 is expected to be paid in 2008.”

For an excellent graphical summary of the breakdown of government payments from 1997 to 2007, just click here.

Other helpful graphs, including information regarding net farm income (graph), corn production (graph), corn prices (graph) soybean production (graph), soybean prices (graph) and production expenses (graph), were also presented.

Meanwhile, Tom Polansek reported in today’s Wall Street Journal that, “Relentless demand for U.S. wheat in the face of high prices catapulted Chicago Board of Trade wheat futures to fresh highs, analysts said.

“Nearby CBOT September wheat climbed to a high of $7.74 a bushel — topping the record of $7.60 set Wednesday — before closing up 28 cents at $7.70 per bushel. Most-active CBOT December wheat set a new high of $7.885 and closed 26 cents higher at $7.845” (see related graph).

The Journal article added that, “Unfavorable weather caused crop losses earlier this year in areas that are traditionally big exporters, including Europe and the Black Sea region. The trade, meanwhile, is becoming more anxious that dryness in top producers Australia and Argentina will damage chances for the Southern Hemisphere to help build global supplies.”

In a related article, Dow Jones News writer Lisa Kallal reported on Wednesday that, “Record prices for European wheat are driving costs up for livestock producers, millers and biofuel refiners which will raise meat and flour prices while slowing E.U. ethanol output, analysts say.

“At a time of historically tight global grains stocks, the E.U.’s key wheat producing nations France, Germany and U.K. were hit by drought in April followed by constant rains at harvest time. In eastern Europe drought and extreme heat cut output in Hungary, Romania and Bulgaria.”

The article added that, “‘Pork and poultry are hit the hardest,’ says Emma Cardy-Brown, feed and animal protein specialist, also with Rabobank. Feed makes up a minimum 50% to 60% of the costs of those meat goods, she adds.

“According to Deloitte & Touche LLP, many U.K. livestock producers have seen feed prices rise almost 100%. ‘It’s not a question of if retail (meat) prices will go up, but will they go up enough,’ said Richard Crane,food and agriculture partner at Deloitte.

“‘If a farmer is losing money producing chickens, he is going to stop producing,’ says James Dunsterville, managing director of Agrinews in Geneva. This in turn will mean fewer supplies making their way to the retail market.”

The article also explained that, “And little respite is expected from the global grain market due to generally tight supplies and the E.U.’s strict zero tolerance policy on non-approved genetically modified products. The E.U.’s GMO policy means corn imports from the U.S. and Argentina will not be possible, leaving Brazil the only source for corn.

“Pedro Correa de Barros, president of the E.U.’s Compound Feed Manufacturers’ Federation, says a current GMO de facto import ban for corn gluten feed will increase E.U. feed costs by EUR60 million to EUR90 million on top of the already high grain prices.

“A similar ban on soybean meal imports will have devastating consequences for European livestock producers, wiping out entire (E.U.) pig and poultry production chains, Correa de Barros adds.”

Some sectors of the U.S. livestock sector, particularly pork, appear to be adjusting more favorably to higher commodity prices.

Purdue University Agricultural Economist Chris Hurt noted earlier this week that, “Somewhat surprisingly, the pork industry has not made supply adjustments with higher feed prices. In fact, pork producers have been modestly increasing the breeding herd and seem content to continue to do so. There seems to be two explanations. The first is that producers of both beef and poultry were quicker to drop production with rising feed prices such that total meat and poultry supplies have been lower this year. Secondly, hog producers were operating at a profitable margin when higher corn prices hit. Rather than trim the size of the herd, hog producers have largely absorbed higher feed prices in the form of reduced margins.

“So far this year, pork prices have been able to stay ahead of the higher feed prices without forcing adjustments to supplies. Production has been up 2 percent, yet farm level prices have also been up as a result of better domestic pork demand. The improved domestic demand probably is related to less competition from other meats and poultry as those industries adjusted to higher feed prices. As corn prices rose dramatically last fall and winter, the beef industry made some sharp adjustments. These included sending many fewer animals to feedlots and reducing market weights. As a result, the availability of beef per person was down nearly 2 percent this spring and summer. Adjustments to high corn prices also came quickly for the broiler sector where production per person was down about 3 percent from last fall through this summer. Egg producers also adjusted quickly dropping available supplies by about 2 percent from late 2006 until the present time.”

Dr. Hurt added that, “The pork industry has not been forced to drop production with higher feed prices as has been the case for beef, broiler, and egg producers. However, the positive margins for pork producers have largely been eliminated with higher feed prices.”

Although higher commodity prices appear to be impacting portions of the food and livestock sectors in both the EU and the U.S., robust prices and projected increases in farm income appear to be an insufficient impetus for dramatically altering U.S. farm policy. At least thus far in the debate, the 2007 Farm Bill more closely resembles the 2002 law and does not provide for substantial changes in policy instruments that reflect changes in some significant portions of the agricultural economy.

Price variability, rather than price level may end up being more of a concern for farmers over the next few years. The parameters of the 2002 Farm Bill, which had its origins in the low price environment of the late 1990s, does not contain policy tools that could provide more assistance for income stabilization, such as farmer savings accounts or revenue insurance.

However, the 2007 Farm Bill has not been signed into law yet and awaits Senate action where proposals that could more adequatelyaddress income stabilization could be included.

In related Farm Bill coverage, the Associated Press reported yesterday that, “The farm bill passed last month by the House doesn’t go far enough in limiting which farmers should be eligible to receive government subsidies, U.S. Agriculture Secretary Mike Johanns said.

“Johanns said the Senate should consider lowering the maximum amount a farmer can earn and still receive federal subsidies from the $1 million per year stipulated in the farm bill.

“Johanns and President Bush believe no farmer who makes more than $250,000 a year should receive subsidies intended to protect them against low prices for major crops such as corn, soybeans and cotton. Bush has threatened to veto the bill over the income limit and a tax on some foreign companies with American subsidiaries.”

The AP article also noted that, “Bob Stallman, who runs one of the largest farm lobby groups and is an opponent of limits on government payments, watched Johanns from the back of the crowd.

“‘We believe farm policy should support agricultural production and not some subjective and social goals,’ Stallman, a Texas rice farmer and president of the American Farm Bureau Federation, said after the appearance.

“Limiting subsidies is a nice idea, he said, as long as farmers in Europe andelsewhere also are willing to live without government support.”

With respect to the reality of the abundance of available tax tools available exclusively to farm operators and the ease with which many farmers could manage their income level, the article stated that, “Some, like Purdue University agricultural economist Allen Gray, question how effective income limits on subsidies would actually be, seeing as how the government would have to rely on farmers’ tax returns to determine their eligibility.

“‘There are all kinds of loopholes in the way in which a farmer can report their farm income,’ Gray said.”

Ethanol

Dow Jones writer Bernd Radowitz reported yesterday that, “Brazil’s state-run oil company Petroleo Brasileiro SA (PBR), or Petrobras, Thursday signed a memorandum of understanding with Indian oil company Bharat Petroleum Corp. (500547.BY) concerning the logistics and sale of ethanol and biodiesel.

“The MOU aims at exporting ethanol to India and other overseas markets, Petrobras said in a release.

“Bharat Petroleum plans to blend ethanol into the gasoline it sells, and also intends to develop business opportunities in international ethanol sales, Petrobras said.

“Petrobras doesn’t produce ethanol itself yet, but has become increasingly active in ethanol exports. In 2008 it plans to export 500 million liters of ethanol.”

Keith Good

Chris Clayton, writing yesterday at the DTN Ag Policy Blog, reported that, “The top congressman on agriculture issues suggested Wednesday that the Bush administration is willing to cut commodity programs as much as 80 percent from current levels to get a global trade deal.

“Criticism of the White House strategy on trade negotiations was a focus at a forum with Democratic North Dakota Sen. Kent Conrad and House Agriculture Committee Chairman Collin Peterson, D-Minn.

“One of the complaints by Peterson is that the administration is willing to demand more cuts of farm programs for the sake of a deal in the World Trade Organization’s Doha Round Talks. Peterson noted the House bill that passed in July is compliant with the current WTO parameters ‘and the 60 percent give up’ offered by the administration in October 2005.”

Mr. Clayton added that, “Peterson said talks behind-the-scenes appear to make the case that the Bush administration is willing to offer even steeper program cuts. Peterson said that is why the administration has tried to undermine the House bill.

“‘They were trying to get me to pass a farm bill that would bail them out of this trade mess they are in,’ he said. ‘But really what is going on here is they are negotiating with themselves.’

“Conrad ripped the Bush administration for its proposal in October 2005 to cut farm payments up to 60 percent. Conrad said it was a failed negotiating strategy akin to going to a car dealer and agreeing to pay sticker price right off the bat rather than holding the line on negotiations. It caused Doha Round talks to fail because other countries then just began demanding more from the U.S., Conrad said.”

The DTN item also explained that, “While farm-program payments over the past five years have averaged close to $16 billion, the U.S. has a $19.1 billion cap under current WTO agreements. A lot of these numbers, though, come down to semantics of what is defined as amber, blue or green-box payments for farmers under WTO rules. The U.S. and trading partners have disputes on just how program payments should be classified.”

With respect to federal farm commodity spending levels, a recent Congressional Research Service (CRS) report (“Farm Bill Budget and Costs: 2002 vs. 2007” (July 17, 2007) indicated that for fiscal years 2002 through 2007, the average annual cost of “Farm Commodity Programs” was just over $12 billion. Adding in “Conservation” and “Exports” took the total annual average up to about $15.5 billion (Table 1, page two).

With respect to future spending, the CRS report stated that, “[The Congressional Budget Office] CBO projects that total farm support (commodities, conservation, and trade) spending under current law over the next six years will be $70.9 billion, which is nearly $22 billion less than the amount actually spent over the last six years (FY2002-FY2007). This lower estimate is driven primarily by projections for sustained high commodity prices for the foreseeable future. The $22 billion reduction consists of about $30.5 billion in reduced commodity spending, but about $8.2 billion in increased conservation spending, and $357 million in increased export spending. In contrast, spending for food stamps increases by about $25.7 billion over the six-year period” (page four).

From fiscal year 2008-2013, the CRS report noted that CBO estimates federal spending for “Farm Commodity Programs” to average around $7 billion annually, while conservation programs will average around $4.5 billion (Table 3, page four).

When compared to projected federal spending for domestic biofuels programs, the CBO estimates for commodity subsidies might appear to be less significant.

As Dan Morgan noted in an article from June, “As President Bush and congressional leaders rally support for their ambitious biofuel proposals, one ingredient is often left unstated: the cost.

“Bush and members of Congress stress energy independence and environmental benefits of federal requirements for a massive increase in the use of biofuels in motor vehicles.But so far they have muted discussion of the prosaic details of how to pay for the subsidies and other incentives seen as crucial for meeting the new biofuels targets.

“If the current tax credits, grants and loan guarantees are extended, the package would cost taxpayers $140 billion more over the next 15 years. New proposals under consideration in Congress could raise that tab to $205 billion.”

Mr. Morgan’s article also noted that, “Loan guarantees for cellulosic ethanol plants could cost $10.8 billion, Energy Department research and development programs could add $6.5 billion, an extension of the $1-a-gallon biodiesel tax credit (which expires in 2008) would cost $10.2 billion and ethanol-related corn subsidies could total $14 billion, according to estimates by a former Office of Management and Budget expert. Grants to help build infrastructure capable of handling such a large volume of ethanol could cost $3.35 billion.

“Hardly any of those costs would be offset by less spending on agricultural subsidies. Keith Collins, the Agriculture Department’s chief economist,said ethanol-driven increases in crop prices lowered farm-program costs by $10 billion over the past five years. But there isn’t much more to save.”

A recent Dow Jones News article implied that this level of domestic support for biofuels has not gone unnoticed by international trading partners.

The article stated that, “In July, Brazil formally filed a plea at the World Trade Organization, charging the U.S. government has handed out billions of extra dollars to its hometown farmers in the grains and oilseed sectors from the years of 1999 to 2005, contrary to WTO rules.

“However, a big question in recent weeks has been whether Brazil, the world’s leading ethanol exporter, would try to tackle U.S. subsidies for ethanol in its newest case, or leave the issue of biofuels for a future date.”

Meanwhile, Associated Press writer Amy Lorentzen provided this anecdotal illustration of how political support for corn-based ethanol is playing out in the U.S. in an article from today.

Ms. Lorentzen reported that, “Don’t expect to hear much talk about farming from the presidential candidates who regularly tour Iowa, one of the nation’s premier agriculture states.

“Instead, prepare for three words: I love ethanol.

“At a time when demand for the corn-based fuel is soaring, support for ethanol among candidates is nearly unanimous and has largely crowded out talk of other agriculture-related issues.”

The AP article stated that, “‘They pay lip service (to agriculture), and then they’re pro-ethanol, and I think that’s enough,’ said Bruce Babcock, director of the Center for Agricultural and Rural Development at Iowa State University. He adds that a pro-ethanol stance translates to farm support ‘because pro-ethanol means high prices for corn and soybeans here.’” (Note: Which further translates into lower Title I price-triggered federal farm payments).

Later, the AP article noted that, “Many in Iowa are pushing Congress to raise the amount of renewable fuel that must be used in the nation’s fuel supply. And there’s interest in what presidential candidates would do in 2010, when a 51-cent-per-gallon of ethanol tax break is up for review.

“‘Energy policy is arguably more important to Iowa farmers than commodity policy,’ Babcock said.”

Some suggest that energy policy is certainly having a trickle down impact on the value of farm real estate.

Elizabeth Williams, writing yesterday at DTN (link requires subscription), noted that, “‘The Midwest farmland market is ethanol driven right now,’ explained Murray Wise with Westchester Group based in Champaign, Ill. ‘That’s why you’re seeing greater value increases in the western half of the Corn Belt. Urban sprawl has slowed down. The title wave of 1031 land exchanges we saw from 2002-2005 has been dramatically reduced.’

“‘Farmers are the driving force of this market right now, but there is a staggering amount of pure investment money looking at agricultural land as a very safe opportunity,’ said Wise.”

With respect to biofuel trade developments, Tim Annett reported yesterday at The Energy Roundup Blog (The Wall Street Journal) that, “Monthly U.S. imports of ethanol in June rose to 820,000 barrels, up 24% compared to May, according to preliminary company level import data supplied by the federal Energy Information Administration. Imports of the plant-derived gasoline additive averaged about 27,333 barrels a day over 30 days in June. There were 14 shipments in June, two more than in May.

“Brazil, the largest exporter in the month, increased exports by about 87% in June to 488,000 barrels in seven shipments, from a total of 261,000 barrels in three shipments in May. The Brazilian material made way to ports in New Jersey, Massachusetts, Connecticut and Pennsylvania.”

However, Dow Jones writer Bernd Radowitz reported yesterday that, “Brazil’s state-run oil firm Petroleo Brasileiro SA (PBR), or Petrobras, expects to export only 500 million liters of ethanol in 2008, Downstream Director Roberto Costa said in a presentation Wednesday.

“That is less than the 850 million liters the company had targeted for this year. The company, however, continues with a 4.75-billion-liter export target for 2012.”

The article noted that, “In its investment plan, Petrobras singles out Japan, South Korea, Taiwan, the European Union and the U.S. as priority markets for its ethanol exports.

“Of the $1.5 billion Petrobras has earmarked for investments in biofuels from 2008 to 2012, 46% will go into the construction of pipelines. The company plans to build at least two ethanol-only pipelines to transport the biofuel from producing areas in the interior of Brazil to Atlantic coast ports.”

As farm policy observers know, technological changes in biofuels production regarding the economic feasibility of cellulosic ethanol production from non-corn feedstocks could alter the market price– federal commodity payment– trade matrix.

With respect to “second generation” biofuel technology, Reuters writer Inae Riveras reported this week that, “Brazil’s state-run oil company Petrobras said on Tuesday it expects to reach large scale cellulosic ethanol production in 2015, with the first plant entering operations as early as 2011.

“‘I believe in 2015 this technology would be arriving at a commercial level,’ Petrobras’ new projects manager, Gilberto Ribeiro de Carvalho, said after a presentation at the Brazilian Agribusiness Association conference.”

***

In a broader look at the Doha round of WTO trade talks, Reuters writer Doug Palmer reported yesterday that, “The last chance for a world trade deal could slip away in the next few months unless India, Brazil and other advanced developing countries offer meaningful commitments to open their market to more foreign goods, U.S. private sector experts said on Tuesday.

“‘What is badly needed is political leadership in key capitals to get the job done this fall. Absent such leadership, my fear is the round will go into a deep freeze for a few years,’ said Mary Irace, vice president for trade and export finance at the National Foreign Trade Council.

“Negotiators will return to Geneva next week to dig into agricultural issues that have been the main stumbling block since the talks were launched in November 2001 in Doha, Qatar.”

The article added that, “One big issue for U.S. business is how much advanced developing countries would be required to open their markets in exchange for cuts in rich country farm subsidies and in tariffs on both farm and manufactured goods.”

The Reuters article concluded with this analysis; “At this point in the negotiations the United States has two options: ‘Accept an imperfect compromise, or accept a more costly failure that could damage U.S. economic interests and the international economic system,’ said Jeffrey Schott of the Peterson Institute for International Economics.

“‘When those are the options you have, then you go for the imperfect compromise,’ but the deal still has to generate enough new U.S. export opportunities to make it politically viable in Congress, Schott said.

“With U.S. lawmakers already losing interest in the talks and the 2008 presidential campaign heating up, negotiators must draw on the draft texts to stitch together the key elements of a deal over the next two months, Schott said.

“‘If countries continue to play the blame game and maintain their past positions, nothing will happen and the window of opportunity for crafting an imperfect compromise will close. That will be it. The round will go into deep hibernation,’ Schott said.”

And Reuters writer Jonathan Lynn reported earlier this week that, “Many developing countries are unwilling to cut their import tariffs — opening their markets to developed and other developing economies, unless the United States is flexible about its farm subsidies, which they say distort farm trade.

“But Washington wants better access for its farm products in developing countries, and is therefore keen to learn which products will be continue to be protected, before it makes a move.

“Clarifying what goes on these lists of special and sensitive products is likely to be an early focus for the Geneva talks, officials said.

“There are other complications with agriculture. Officials from developed and developing countries alike expressed concern at the U.S. farm bill working its way through congress. This sets spending and support for American farmers for the next five years, but conflicts with efforts at the WTO to reduce subsidies.”

Keith Good

Bloomberg writers Heloiza Canassa and Romina Nicaretta reported yesterday that, “Cargill Inc., the largest U.S. agricultural company, said Brazil faces a glut of ethanol in two years as supply grows faster than domestic demand…An increase in ethanol exports to the U.S.would reduce the risk of oversupply, said Sergio Rial, the company’s Latin America director. The U.S. currently imports only 3 percent of its ethanol consumption, he said during an interview in Sao Paulo today.”

I. Farm Bill- Production / Prices
II. Ethanol

I. Farm Bill- Production / Prices

DTN writer Chris Clayton reported yesterday (link requires subscription) that, “U.S. senators working on the farm bill are grappling with ways to craft a revenue assurance plan that would work on a local level, but the cost of such an income-based counter-cyclical program is a problem.

“The farm bill is ‘at a critical moment,’ Sen. Kent Conrad, D-N.D., told farmers at a forum Tuesday with House Agriculture Committee Chairman Collin Peterson, D-Minn., at a farm outside Hillsboro, N.D. Senators are negotiating over a lot of concepts and trying to determine how they would work in practice, he said.

“Conrad lauded Peterson repeatedly for his work in getting a bill to pass the House, but Conrad noted that a revenue-based counter-cyclical program based on a national per-acre income would not work, particularly in states prone to yield swings, such as North Dakota.”

Mr. Clayton indicated that, “A national trigger works better in more stable yield states such as Indiana, Iowa and Illinois, Conrad said. The problem with a county revenue trigger, however, is that it could cost $5 billion to $6 billion more to implement. That was the reason the House established the new counter-cyclical program on a national level and as an option — farmers can choose it or stick with the current counter-cyclical program.

“‘The reason we put it as an option in the bill was because it cost $5 billion and we didn’t have $5 billion,’ Peterson said. ‘Right now, a lot of us don’t know how it would work and that’s the reason we had it as an option.’

“The National Corn Growers Association has pushed for a county-based revenue counter-cyclical program, but most other commodity groups have begged off the plan. The Bush administration backs a program based on a national trigger price or per-acre revenue.”

Interestingly, near the article’s conclusion, Mr. Clayton reported that, “One possibility, Conrad told the 80 or so farmers in attendance, is that the Senate could very well reaffirm the House bill then work out certain issues.

“‘We may come to a situation where we pass (Peterson’s) bill in the Senate then go to conference and work out the details there,’ Conrad said.”

In agricultural production news, Philip Brasher reported in yesterday’s Des Moines Register that, “The government says most of Iowa’s crops are in good to excellent shape, despite the heavy rain and strong winds that knocked down fields of corn in northern Iowa last week.

“In its weekly crop progress report, the U.S. Agriculture Department estimated Monday that 70 percent of the state’s corn crop was in good or excellent condition, compared with 71 percent the week before.”

The Register article stated that, “Cornfields that have suffered wind damage can still be harvested, though farmers have to slow their combines, which means it take more time and fuel to get the crops in the bin.

“In some areas, cornstalks have been blown almost flat, making them prone to disease. The plants will die if they are standing in water for too long, reducing grain yields, agronomists said.

“In northern Humboldt County, ‘the wind damage is horrendous,’ said John Holmes, the Iowa State University extension agronomist for nine counties.

“In many fields, he said, the stalks are ‘not just leaning, they’re flat.’”

Bill Hord, reporting in yesterday’s Omaha World-Herald indicated that,“The Midlands’ two major crops are on target to provide record yields and record income for farmers, despite spotty damage from wind and heavy rain.

“Not only are corn and soybean prices high, but crop conditions in Nebraska and Iowa are even better than they were in the record yield years of 2004 and 2005.”

Mr. Hord also noted that, “In Nebraska, 77 percent of the corn is in good or excellent condition, according to Monday’s crop progress report from the U.S. Department of Agriculture.

“In 2004, when the state’s corn produced a record 166 bushels per acre, on average, only 71 percent of the crop was rated good or excellent at the end of August.”

“The condition of soybeans was rated 79 percent good to excellent in Nebraska, compared with 65 percent at the same time in the record yield year of 2005.”

With respect to prices, the Associated Press reported yesterday that, “Corn for December delivery fell 8.25 cents to $3.4475 a bushel, while soybeans for November delivery finished down 0.5 cent at $8.7225 a bushel.”

An item posted at Barron’s Online yesterday, under the tag, “UBS Investment Research,” stated that, “We expect a 2007 corn yield of 156 bushels per acre, above the USDA’s forecast for 152.8 bushels per acre. We continue to expect a larger-than-consensus corn crop to cause an increase in corn inventories and a reduction in corn prices into the harvest.”

II. Ethanol

Bloomberg writers Heloiza Canassa and Romina Nicaretta reported yesterday that, “Cargill Inc., the largest U.S. agricultural company, said Brazil faces a glut of ethanol in two years as supply grows faster than domestic demand.

“An increase in ethanol exports to the U.S. would reduce the risk of oversupply, said Sergio Rial, the company’s Latin America director. The U.S. currently imports only 3 percent of its ethanol consumption, he said during an interview in Sao Paulo today.

“Cargill, based in Wayzata, Minnesota, is doubling sugar cane-processing capacity at its Cevasa plant to 1.2 million metric tons a year starting mid-2008, according to Rial. The plant will produce ethanol and most of the output will be exported, he said.”

Meanwhile, Chris Clayton, writing earlier this week at the DTN Ag Policy Blog, noted that, “One of the lingering ag policy questions not being answered rightnow is what may happen to the ethanol and grain markets once the country’s ethanol producers hit the 7.5-billion gallon renewable-fuels standard.

“The issue needs to be addressed because that 7.5-billion mark is coming up quick. Bob Young, chief economist of the American Farm Bureau Federation, spoke Thursday to the North Carolina Farm Bureau’s policy group. Young said that right now, ethanol-plant capacity is at 6.8 billion gallons and by next July the plants under construction will push capacity to 12.8 billion gallons.

“When oil companies make their 7.5-billion gallons of renewable-fuel buys for the year, there is no obligation or incentive for them to buy more. Hardball price negotiations could create a significant dip in prices and cause ethanol plants to operate at significantly lower capacity.”

The update also stated that, “I asked Young what would happen to the ethanol market when we hit that 7.5-billion mark.

“‘That’s a real good question and some of the data on that is going to be hard to come by as to what the markets are doing,’ Young said. ‘One of the variables you want to look at very closely over the next six to nine months is going to be capacity utilization. How hard are those plants running?’

“That 12.8 billion gallons, or effectively 13 billion gallons, is plant capacity that is going to happen, Young said. Those plants are pouring concrete and gearing up for production. The question then becomes if anyone else would be able to get into the ethanol market without an improved RFS.”

This issue also highlights the growing importance of the market price of crude oil as a variable in the potential profitability of ethanol production. As I stated in a paper from May, “Because corn-based ethanol may have to compete with unleaded gasoline as a low-cost input for fuel blenders, as production exceeds mandate, ethanol demand will be influenced by the price of oil. An increase in the price of oil will likely make ethanol a relatively cheaper input for fuel blenders to use compared to unleaded gasoline.”

And, as economists from the University of Illinois noted recently, “Once Federal mandates for use of biofuels are reached, ethanol’s primary use will be as a substitute for gasoline…[M]oreover, ethanol price will be directly related to crude oil price.”

This report also included a break-even corn price model for ethanol production based on crude oil prices (summary chart here). According to this research, if crude oil is priced at $70 per barrel, ethanol processors could pay as much as $5.40 per bushel for corn and still cover all the costs of production.

Tim Annett noted yesterday at The Wall Street Journal’s Energy Roundup Blog that, “Crude-oil futures ended lower, below $72 a barrel Tuesday, with declining U.S. equities and refinery restarts in Texas and Mississippi outweighing concern that natural gas production could be hit by a storm along the U.S. Gulf coast.”

As noted above, December corn futures closed yesterday at $3.4475 a bushel.

Keith Good