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Ag & Energy A Disruptive Event. David Miller Director, Research & Commodity Services, Iowa Farm Bureau. Food, Feed or Energy. A couple key questions If crude oil stays above $60, how will agriculture be affected? Are biofuels a fad or a sustainable trend?
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Ag & EnergyA Disruptive Event David Miller Director, Research & Commodity Services, Iowa Farm Bureau
Food, Feed or Energy • A couple key questions • If crude oil stays above $60, how will agriculture be affected? • Are biofuels a fad or a sustainable trend? • What unintended consequences are apt to arise from the emergence of the biofuels industry? • Will we run out of corn?
A Disruptive Event • Corn price expectations • Land capitalization • Increased risk • Acreage shifts
Pulling: Ethanol From Corn • Where do we get all of these acres?
Ethanol & Corn Use • What if: • 100 million acres of corn • 200 bushels per acre • 20 billion bushel corn crop • 10 billion ethanol grind • 30 billion gallons of ethanol • Is this possible in a decade?
Corn Price Determination • PC = 3*[(PG*.667)+VEETC+DDG-OP-CAP] • PC = 3*[(1.80*.667)+0.51+0.22-0.52-0.24] • PC = 2*1.77 = 3.54
Land Values • P(Land) = [(P(Corn)*Y(Corn))+G(Payments)-OP(Costs)]/(I(rate)) • P(Land05) = [($2.00*170)+$50-$150]/(.06) • P(Land05) = [$240]/(.06) = $4,000 • P(Land08) = [($3.50*180)+$0-$180]/(.06) • P(Land08) = [$450]/(.06) = $7,500
Cash Rents • CR = P(Land) * 0.05 • CR(Land05) = $4,000 * 0.05 = $200 • CR(Land08) = $7,500 * 0.05 = $375
In Conclusion • Demand shocks last much longer than supply shocks • Supply adjustments will come much quicker than we currently anticipate • Livestock production will adjust to new price levels • Adjustments will be made worldwide • It appears that we can have food, feed and fuel