Energy bust threatens farmer earnings

Source: By Connor Hyde, Argus Media • Posted: Tuesday, March 31, 2020

Debt-laden farmers face a collapsing energy market that threatens to stunt corn demand and overall revenue after weathering last season’s historic flooding and a trade war.

Plunging oil prices and waning gasoline demand during the last two weeks have further crunched ethanol production margins, forcing many manufacturers to idle operations or curtail production during the last two weeks — eroding near-term corn demand.

About 20pc of ethanol plants in the US have idled and another 40-50 facilities curbed output, according to the Renewable Fuels Association.

Between 400mn-500mn bushels of corn may not be consumed if the cuts in ethanol production stretch through May, according to INTL FCStone risk management consultant Jake Moline, amounting to $1.52bn-1.9bn in lost revenue based on the US Department of Agriculture’s (USDA) average farm price in March.

Farmers will likely re-evaluate crop mixes for this season when faced with potential revenue losses of this magnitude but this is unlikely to be reflected in the USDA’s acreage forecast tomorrow, Moline added.

“If you are unsure if that ethanol plant will be running, you are then scratching your head whether or not you are going to plant corn,” Moline said.

The US ethanol industry consumes about 38-40pc of domestic corn production, according to the US Department of Agriculture (USDA), and has supported the US as a global leader in corn output since 2007.

The massive expansion of biofuel production in the US — kickstarted by the Energy Independence and Security Act of 2007 — bolstered farmer earnings and fueled growth in the agricultural sector as the nation slipped into the Great Recession.

The timing of the recession “came in during a period right when farm income was taking off, and then it kept going to about 2013,” USDA senior economist Carrie Litkowski said.

But as the energy sector shielded the nation’s corn sector from a recession 10-12 years ago, it is primed to capsize at-risk farmers still recovering from last season’s flooding and the now de-escalating trade war with China.

Farmer debt this year is forecast to balloon to an all-time high of $425.3bn, according to the USDA, while bankruptcy cases continue to amass in the US heartland.

Chapter 12 filings — a form of reorganization specifically for farmers — rose to a new high at 580 cases during the 2019 government fiscal year, which runs from October to September, according to US federal courts data.

President Donald Trump has aimed to keep farmers afloat through subsidies. The Trump administration last year approved the highest amountof federal aid since 2005 after severe rains caused flooding and delayed planting, while the trade war with China severed a major, long-established destination market for soybean growers.

Farmers this year are set to receive another $23.5bn of direct federal assistance after Trump on 27 March signed the massive $2 trillion stimulus package geared to provide economic relief to various industries from the coronavirus disruption.

“We are going to keep our small businesses strong and our big businesses strong,” Trump said during the signing ceremony. “And that is keeping our country strong and our jobs strong.”