In the early morning, Dale Launstein's new grain bin is so big it blocks the rising sun. This 240,000-bu. bin stands 86 ft. tall and is half the size of the local elevator.
“Just how much storage does this guy think he needs?” ask the locals at lunchtime at The Lonetree Inn in downtown Holland, IA.
Launstein thinks his family operation needs a lot — 553,000 bu. They expect to fill their storage bins with this fall's corn crop, which is hefty. Like many other farmers in the Midwest, the Launsteins planted more corn acres after prices shot up to $4/bu., an outcome credited to ethanol production's heavy demand for corn.
“The market was dictating that corn was going to be the best thing to grow in 2007, but we knew that it was not going to stay that way forever,” Launstein says. “So the intent was to put up this bin and pay for it very quickly with a corn-on-corn rotation.” He estimates the price of the bin and equipment to be a half-million dollars and expects to pay for it in three years.
Launstein is only one of many growers across the Midwest who have changed their buying plans to take advantage of the ethanol boom. And perhaps nowhere is this best characterized than in Grundy County, IA, where Launstein and his family are longtime residents. Here generations of farmers have grown bumper crops in the county's 6 ft. of rich topsoil. This county commands the second highest land values in the state. “The joke is you won't find no better dirt than in Grundy County,” says a local resident.
Many of the Launsteins' neighbors have invested in buildings, equipment, new enterprises and more land throughout the county. New have bins shot up. Livestock buildings have appeared. New combines are rolling through the fields. Growers here hope to capture what profits they can while corn prices are high and before input costs catch up.
In a visit to Grundy County in late summer, we found plenty of optimism among the farmers and town residents. The trickle-down theory with strong grain prices is proven here: Everyone is benefiting. Even the local auto parts retailer says he can tell what crop prices are doing by the number of auto parts sold in a day.
But mixed with the optimism is a dose of caution, and maybe for good reason. At press time, the price of ethanol had dropped $0.50/gal. from two months earlier. News reports spread about the suspension of new ethanol plant construction. With ethanol prices so low and corn prices still high, ethanol plant profitability has to be in question.
During our visit to Grundy County, we talked with a number of different farmers and agricultural businesses to see how ethanol has changed the landscape and what might happen if the ethanol boom goes bust.
Machinery sales jump
Green is the dominant color of equipment in Grundy County. And the biggest John Deere dealer there is Phelps Implement Company headquartered in Grundy Center. Aftermarket manager Randy Phelps says sales have increased about 20% at the dealership ever since corn prices took a leap last fall.
“Last fall no one had an inkling that things were going to take off like they did,” Phelps says. “There was a 40-day window that all of a sudden we went from having a decent year to a great year.”
He recalls Deere & Company officials discussing the price fluctuation that took place in the October-November 2006 time frame at the company's annual dealer meeting last February. Corn prices jumped a dollar or better — from about $2.50 to $3.50.
“Our whole philosophy of thinking changed knowing there would be more money out there and that farmers were going to make more money,” Phelps says. “And they need to make more money just to keep pace with the rising cost of inputs. Corn prices 30 or 40 years ago were about the same as they were two years ago. But the prices of gas, cars, equipment and seed are a lot higher now.”
He estimates that as many as 50% of his customers have raised more corn this year than last year in response to the higher corn prices. He says when farmers make more money they spend more money with car dealerships, implement companies and other retailers in town.
“It all trickles down,” he says. “In our business, if a farmer is able to make a good income, he is going to update his equipment. He is going to come to me and either spend more money fixing up what he has or trading it for new equipment to stay more current.”
The trend is to buy bigger equipment that can take on the higher yields of corn and the extra stalks and debris it leaves behind. This includes larger planters, second combines, bigger grain carts, deeper tillage tools like disk rippers, 4-wd tractors, stalk choppers and batwing mowers.
Because of its higher sales volumes, the dealership is putting an addition on the back of its main store to have more parts on hand for customers. “We want to be farmers' one-stop shop where they can come in and know they can get what they want,” Phelps says.
Loan volumes up
Ten miles south of Grundy Center is Conrad, IA, where a branch of the Grundy National Bank resides. Shane Tiernan, business development officer, occupies the front corner office and is busy assessing loan requests.
He says loan volumes among his farmer customers are up this year because the cost of production has risen in step with higher crop prices.
“At this point in time ethanol and the whole oil shortage have created an opportunity for us,” Tiernan says. “We are loaning more money to the same producers because land values and farmers' annual production costs have gone up.”
He says the higher loan volume is good for lenders, but it also presents some risks. If crop prices drop, farmers may not have the income they need to pay back the loans.
“What a lot of people haven't grasped yet is that while we have $3.50 corn, costs have gone from roughly $75/acre for inputs and $180/acre for cash rent up to $150 for inputs and over $200/acre for cash rent,” he explains. “So while the margin is currently larger, that margin at the production level is going to shrink and will continue to shrink and that is the fear.”
He uses Allan Greenspan's term “irrational exuberance” to describe the current land prices in the area, valued anywhere from $5,800 to $6,700/acre. He says values are close to double what they were five years ago. The higher values have pushed up average cash rents 25%.
“Cash rents need to be priced around $300/acre in order for investors to see a 5% return on their investment,” he says. “I don't think $300 cash rents are sustainable.”
As a result, the bank is taking a conservative approach to ag real estate financing, lending only to those borrowers who put up additional collateral that limits the bank's risk to around $2,000/acre.
To guard against a price drop, Tiernan advises all borrowers to rethink their costs of production, take advantage of marketing opportunities when they are available, and have a clear understanding of what is an acceptable profit margin.
Arlyn Schipper and his son Brent have a new farm office in Conrad, IA. Brent joined his dad on their crop farm last year after earning a college degree in agricultural studies.
This father and son team hire professional advisors to fill the roles they consider “outside their expertise.” The team consists of a banker, crop consultant, accountant and market advisor.
This year the Schippers planted 80% of their acres to corn instead of the typical corn-soybean rotation. And after doing the numbers, Arlyn decided to erect two 450-head cattle buildings on their farm that they can rent out. They will use dry distillers grain, a by-product of a nearby ethanol plant just across the county line, as a local feed source to make the operation more economical.
“Our whole economy is driven by freight costs,” Arlyn says. “For every load of cattle it takes nine loads of corn to feed them out. We may just as well feed them where the grain is at and avoid those freight costs.”
The Schippers will provide the feed along with cornstalks for bedding and will use the manure as fertilizer on their corn acres.
“Ethanol has made Iowa a cheaper place to feed cattle because we now have the feed supply here,” Brent says. “There are a lot of people bringing cattle up into this area just to save on feed costs, especially with the higher price of corn. They need the feed to stay as cheap as they can.”
While the Schippers believe ethanol is here to stay, they also say that farmers need to be cautious. “With all these higher prices in the last nine months, there is also a lot more money at risk,” Arlyn says. “Yes, we are at a higher market, but margins could get tight if the cost of production keeps increasing.”
The Launsteins' new grain bin rises up from the flatlands of Holland, IA, like a giant monument to corn. Eighty-six feet tall and 78 feet around, the shiny sheets of stacked steel stand in the headlands of their farm.
This mammoth bin is just one more example of how ethanol's price hike on corn is changing the buying landscape of farming. It is the biggest grower bin in a county that is swamped with new bin building.
The Launsteins' operation was at full capacity with its previous 303,000 bu. of storage, and Dale and his family had no plans of slowing down crop production. Dale figured it would be cheaper to put in another new bin than to pay the elevator to store his extra corn.
“How are we going to pay for that?” was his dad's first question when Dale proposed adding the new bin. Dale farms with his dad Ray, mom Jan, wife Amy, and brother John and his wife Violet.
Dale calculates they can pay off the cost of the bin in three years with a corn-on-corn rotation that they have used for a few years. The Launsteins plant 80% of their 3,360 acres to corn, most of which is waxy corn. They haul the regular corn to ethanol plants and sell the waxy corn to Cargill, which pays a percentage premium over and above the market price of dent corn.
The storage allows them to store their crop and sell it when they want and not at harvest when prices are low. They avoid the hassles of delivering to an elevator known for long lines, shutting down at noon, and dumping corn on the ground.
“There have been some farmers hurt financially because they were forced to sell grain during the harvest low, hurt as much as $0.30 to $0.35/bu. If you take a $0.35/bu. loss three years in a row, you can come close to buying a grain bin in four years,” Dale says.
The extra storage also allows them to rent additional land should it become available. “A neighbor and I both think ground is going to be in for a retracement,” Dale says. “We're guessing it is going to go back down to $4,000 or less an acre.”
The reason? “We think ethanol is going to fail,” he says. “This is the worst thing that could ever happen out here. Fifteen to 25% of farmers will disappear.”
He says if ethanol slows down for any reason, like lower-priced oil or availability of another alternative source of energy, it will change everything. “Ethanol has inflated costs greatly,” he says. “Everything has gone up — land, cash rents, input costs, fertilizer, seed, machinery. Everybody is taking their price levels up to cash in on the ethanol boom.”
He reasons that if corn prices drop and input costs remain high, corn farmers will suffer greatly.
Business of ethanol
Ron Saak is a Grundy County native who has spent the last four years developing agribusinesses in Iowa and the surrounding states. His cluttered office in downtown Grundy Center looks like he just moved in.
Saak and his business partners Steve Baker and Brad Petersburg call their business Rural Development Associates (RDA). They work with clients to identify, develop and commercialize new business.
“The last ethanol project we developed was a 110-million-gallon plant in Council Bluffs called Southwest Iowa Renewable Energy located by Mid-America Energy,” Saak says. “We are pulling waste steam off of Mid-America Energy's coal-fired plant and circulating it through the ethanol plant.”
Saak's focus for locating ethanol plants has been to find areas with strategic advantages like transportation or preexisting energy sources so a new plant is competitive. Recently his group announced it will develop a plant in Keokuk, IA, with construction starting in the spring of 2008. RDA America will be a 55-million-gallon pure ethanol plant that will locate next to an existing corn wet milling plant owned by Roquette America Inc.
“We will have a wet mill and a dry mill plant co-located whereby we can capitalize on a number of synergies between the two organizations,” Saak explains.
Ironically, Saak hasn't worked to locate a plant in Grundy County. Why not? “The county does not have a rail line, and consequently all products have to be trucked in and trucked back out,” he says.
However, lack of a plant within the immediate area does not diminish ethanol's effect on this county. Saak says ethanol plants are destination markets, and each plant built — regardless of where it is located — is good for the economy because it affects corn basis and the consumption of corn.
“Ethanol is obviously changing the whole landscape with the consumption of corn,” he adds. “Not only has it run futures prices clear up to $4 but also has a direct impact on basis. That is why you are seeing the amount of corn storage that is going up at elevators and on the farm. I think spreads could be as wide as they have ever been this fall.”
Another benefit of ethanol plants is that they create investment opportunities for farmers and others in the community. RDA reserves small blocks of shares that can be purchased by the local community. He says that when farmers invest in an ethanol plant they have pride of ownership and an incentive to sell their grain to that plant.
RDA also takes shares in the plants as part of its compensation plan. “This helps keep our interests aligned with the rest of the farmer shareholders so they know we are in this business for the long haul,” Saak says.
Now RDA is looking for companion businesses and new processing methods to make ethanol production more efficient. Saak says breaking the corn into more pieces and parts and finding additional uses for the different parts of the kernel will make each plant more profitable.
When asked if ethanol production is a boom or bust, Saak says, “We'll know much more in five years. I do believe there is a strong conviction in trying to find alternative energy sources. And I think the government will continue to support research of alternative energy sources.”
More seed corn acres
Another big change in the landscape is more seed corn acres. According to the SCS office in Grundy Center, production of seed corn in the county is up 15 to 20% from last year in response to the increased demand for corn seed nationwide.
Many seed corn companies depleted their inventories when 90 million acres of corn were planted this year. “I know that all the majors who grow seed corn here [Pioneer, Mycogen and Syngenta] have contracted a lot more acres than last year,” Saak says.
He says the increase in seed corn is good for the local economy because it gives farmers an additional source of revenue that doesn't conflict with their normal production schedules. Plus it increases the demand for labor and results in sales of specialized equipment such as detasseling machines, seed corn pickers and wagons.
East of town is Oxbo International, a company that services and sells seed corn pickers. This year the company is adding five service bays to meet increased demand.
“The preharvest preparation is extremely intense this year with the increase in seed corn acres,” says facility manager Mark Dutton. Every bay is occupied with pickers, just one week before harvest.
On the lot a customer is tinkering with a brand-new Oxbo EL30 picker. “This unit will give me more capacity,” says custom harvester Bob Atkinson. Pioneer contracts with Atkinson to harvest seed corn for its Reinbeck plant in Grundy County. Atkinson also farms his own ground in nearby Butler County.
Atkinson is paid by the acre and expects this year's acres to be up 20%. “The reason I upgraded was because of the increase in acres,” he says. “It helped to justify the new purchase. Since I was upgrading, I decided to go with a machine that had a larger capacity. The new machine will handle a 12-row head, whereas the old one was only for eight rows.”
Input sales increase
The largest co-op in Grundy County is Heartland Co-op with 41 locations in 23 counties. Marc Melhus is vice president of operations and works out of the co-op's headquarters in West Des Moines, IA. He reports input sales are up this year compared to last year.
“Obviously with the additional demand for corn used in producing ethanol, more acres are being shifted from soybeans to corn,” Melhus says. “So from a co-op perspective, there are sales to be gained in seed corn, fertilizer and crop protection products.”
Overall, he sees a shift of 5 to 15% more corn acres planted in the state. As a result, he expects input sales at his co-op to increase by an equal percentage value, unless customers find ways to reduce their costs. For example, more farmers are looking at manure as an alternative source of fertilizer. “If they can cut corners at some level, they will,” he adds.
In July, Heartland Co-op merged with Central Counties Co-op, expanding from 29 elevators to 41 under the Heartland Co-op name. Melhus says the merger was driven by the continuing consolidation of farms, which has been accelerated by ethanol production.
Farms are getting larger, and the operators are demanding more from their local co-op to support their growing number of acres. “They want high-value products at a low price and they want a lot of service typically,” Melhus says. “So co-ops have to get bigger to be able to meet farmers' needs.”
Even as most residents of Grundy County benefit from the surge in ethanol production, they are bothered by one nagging worry: How long can the good times last?
Melhus says the recent downturn in profitability of ethanol plants is forcing investors to rationalize their investment, which he thinks is healthy for everyone in the industry.
“Uncontrolled growth was not good for anybody,” he says. “So I think people are paying a lot more attention this year versus last year as far as prices, margins and what they pay.
“It's not, build it and they will come,” like it was a year ago, he says. “It is more of a planned investment with a measured outcome.”
He thinks the future of the plants is contingent on the price of oil. “If gasoline stays high, it is easier for buyers to justify ethanol because the ethanol price is typically higher,” he says. “If gas gets real cheap, there is less of a need for ethanol.”
But for now, he says, “ethanol has been awesome for farmers, because it has given them price opportunities in the marketplace that we haven't seen for a long, long time. And never for this extended period.”
|Corn harvested for grain (acres)||152,800||12,350,000|
|Corn harvested for grain (bu.)||27,021,000||2,050,100,000|
|Corn yields (bu./acre)||176.8||166.0|
|Soybeans harvested (acres)||136,000||10,100,000|
|Soybeans harvested (bu.)||7,671,500||510,050,000|
|Soybeans yields (bu./acre)||56.4||50.5|
|2006 Census of Agriculture estimates|