Tuesday, September 4, 2012

Phi Scamma Jamma: Row Crops and Subsidies (and Dennis Gartman swings by)

The title suggests the whole panoply of ways that farmers, in particular large farmers, suckle at the government teat.
We don't have time to get into all of the fine points of ag economics so here are a couple of the precepts.

1) Substitution. Just as consumers will substitute lower price goods for higher, farmers will substitute the higher profit crop. In eight of the last ten years corn has been the largest crop of the state once synonymous with wheat, Kansas. The soybean to corn price ratio is one of the basic numbers that any solvent farmer in the whole arc from Indiana through Iowa to Minnesota knows.

2) You get what you subsidize. If it was government policy to subsidize walnuts you can bet the price of walnut oil would come down as acreage went up.

But no. The politics of the farm belt get the subsidy money, for far-under-market crop insurance premiums, direct payments, counter-cyclical (price triggered) payments, marketing loans with their attendant "loan deficiency payments" etc. to the five major "program" commodities of corn, soybeans, wheat, cotton, and rice.

Throw in the EPA's mandate that oil refiners/blenders mix 15.2 billion gallons of "renewable" fuel into their gasoline and you have a sweet deal for the top 10% of American farms that collect 72% of the subsidies, sort of a Pareto Principle on steroids.

Here's FT Alphaville with more:

The soybean, the bushel and the ethanol mandate
The performance of the Soybean future since the 1990s:

And on a shorter-term basis:

It’s not quite clear on that chart, but according to Reuters the price of soybeans in Chiacgo is now at a fresh record high due to falling exports from Brazil and the historic drought in the United States:
Chicago soybeans climbed to a record high on Tuesday as falling exports from Brazil highlighted the decline in global supplies after poor production in South America and a historic drought in the United States.
Corn and wheat jumped around 1 percent with rising expectations of global economic stimulus measures underpinning the commodity markets, including oil and metals. Brazil exported 1.96 million tonnes of soybeans in the first four weeks of August, down from 4.13 million tonnes shipped in all of July, according to trade ministry data. Brazil is the world’s second-largest exporter and the decline in its sales means demand will intensify for oilseeds from the United States and other origins.
Dennis Gartman writing in his daily note, however, observes, that the record has been achieved despite what have been rather substantive rains across a good portion of the Midwest....MORE
Although we don't have much time for Mr. Gartman's equity prognostications, the grains are an entirely different matter and he shows forecasting skill and excess returns.

For more on the rain in soybean country see July's "What Could Break the Drought? A Hurricane Would Be Nice (88% of Corn Areas in Drought)" where we used Hurricane Ike as the analog or August's "Hurricane Watch: Will Isaac Break the Drought?" where Wunderground used Gustav.