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The Circle Bastiat

Big Ag boom is thanks to state subsidies

Farmers planted a near record number of acres of corn this season, which has caused corn futures to sink

By Douglas FrenchGuest blogger / July 5, 2011

A farmer drives his tractor through a corn field near Hollandale, Miss., Monday, May 23, 2011. Farmers have continued to farm their lands despite the constant fear of levees breaking or excessive seepage from the flooding of the Mississippi River and its tributaries ruining their crops. Corn prices dropped below $6 a bushel last week for the first time this year.

Rogelio V. Solis / AP / File


Corn prices took a two-day shellacking last week, settling under $6 a bushel for the first time since last December. Traders were caught wrong-footed, expecting wet weather to have slowed corn planting.

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Weather didn't get in the way of economics. The US Department of Agriculture said last week that surveys conducted during the first two weeks of last month found farmers had planted 92.3 million acres of corn, the second most since World War II after 93.5 million acres in 2007.

The news sent corn futures down nearly 10 percent on Thursday and another 3.8 percent on Friday, after prices had reached close to $8 just weeks ago.

Some economists think the USDA not only can't count but didn't take into account the acreage that's flooded in corn country. But for now the government reports "threw a wrench into everything we were thinking," said Curt Hudson, whose family farm has 2,500 acres devoted to corn growing.

Hudson not only grows but speculates on the commodity. He had purchased options on corn futures recently, expecting a bullish USDA report, while also holding on to some of last year's crop expecting to take advantage of higher prices.

In 2005, corn fetched less than $2 a bushel, and farmers are like anyone: chase a buck and a bubble. Bill Bonner wrote a couple years ago,

Judged as a businessman, the typical farmer would make a good veterinarian. Over and over, he walks into the same trap. When prices go up, he borrows in order to expand his holdings. He buys more equipment. He leases more land. And he plants more crops to take advantage of the high prices.

Although Mr. Hudson had forward-contracted to sell 40 percent to 50 percent of this year's crop at the elevated prices, the report is "frustrating and stressful," he told the Wall Street Journal.

This isn't the first time grain prices have boomed. Crop prices surged in the 1970s as grain demand from the Soviet Union swelled. Farmland prices shot up 30 percent a year in the mid-1970s, peaking in 1979 with prices in Iowa averaging $1,958 an acre (that would be just short of $6,000 if adjusted for inflation). The net cash yield on land was 4.55 percent in 1979.

But the trend did not last, and prices fell. When rising interest rates at the time began to hit troubling levels, the two developments together jolted the Farm Belt, driving down land values nearly 30 percent in the 1980s, with net yields reaching 10 percent.

Of course, today's Big Ag boom is sponsored by ethanol subsidies from the state. Just as when the federal government told farmers during WWI to grow wheat to win the war, Congress voted to double production of corn-based ethanol "to win Al Gore's war" — and so a third of the US corn crop could be dedicated to making fuel, up from 7 percent in 2001.