ARCHER, Neb. -
That was in 1996, when conditions governing supply and demand more than doubled market price for the agricultural staple, said Lamon, CEO of $45-million CU. But like all things agricultural, the price of corn proved cyclical and quickly declined.
Thanks to the increasing demand for ethanol, the price of corn is up again. At $4.50 per bushel-$1 per bushel less than the high price of little more than a decade earlier-the price has more than doubled last year's $1.70 to $1.90 per-bushel price and is roughly twice the 10-year average of $2.25 bushel.
But as Lamon and other agricultural lenders know, market price is as malleable as the weather. What's more, one farmer's ethanol windfall can be another farmer's financial shortfall.
"There's a direct relationship between ethanol demand and the price of corn," says Lamon, who's been an AG lender for 31 years. "We're enjoying the situation today and hope it will continue, but eventually the economy will change it."
Agricultural credit unions and many of their members are benefiting from the ethanol boom, with rising crop prices, increased land values and investment opportunities from new ethanol plants helping boost income. Increased revenue for crop farmers means rising credit union deposits, which are sometimes difficult to attract in rural areas. It also means more equipment loans, greater retail sales, increased small-business lending, and a higher level of economic activity overall among rural communities in which credit unions invest through their members.
But the economic growth from ethanol demand doesn't impact all farmers positively. Concurrent rising prices for seed, fertilizer and fuel blunts the increased profits from corn sales for all.
And farmers who compete with ethanol producers for raw materials have often found themselves on the wrong side of the revenue equation.
Cattle, Hog And Poultry Producers
Cattle, hog and poultry producers now pay more for feed corn, which is raising their cost of production. If market prices can't absorb their increased production costs, their financial margins will be squeezed and profits reduced.
Just ask the gaggle of turkey growers located near Central Minnesota Federal Credit Union. Thanks to the ethanol boom, it costs those growers a lot more to feed their birds, according to Central Minnesota Federal Credit Union's Mike Wehlage.
"The crop guys are benefiting from the boom and paying down their lines of credit, while the poultry people are carrying higher balances," said Wehlage, chief credit officer for the $460-million Melrose, Minn. institution. "I'd say the return has been 50-50, with positives and negatives on both sides."
Credit unions serving multiple types of farmers have seen increased financial activity on all sides, from seed loans to land sales.
Rising prices mean greater financial growth, but the disparate impact on different agricultural sectors also means greater vigilance from lending officers to maintain the right loan portfolio balance, while still helping meet member financial needs, particularly as they relate to growing enterprises attempting to capture more ethanol-related income.
"We're seeing a huge impact on cash flows from real estate loans," said Dick Nesvold, president of SouthPoint Federal Credit Union. Land values in and around the $156-million Sleepy Eye, Minn.-based institution have risen to $4,000 per acre from $2,500 per acre in a short time, helping boost the credit union's $150 million loan portfolio. As a result of this and other price increases, area hog farmers have a felt a pinch in the operations side, forcing them to raise the price of pork by some 25%.
"Our hog producers are players in this area, too," said Nesvold, who also serves as chairman of the Minnesota Credit Union Network. "[The ethanol boom] has changed their operations' profitability and spreads."
Wehlage, whose credit union's ag loans comprise $120 million of its $230-million loan portfolio, agrees: "It comes down to managing your portfolio. You don't want to put too many eggs in one basket."
Opinions differ, but most lenders agree that ethanol demand will have an impact for some time to come.
Whether the supply of corn will keep up with demand-corn acreage nationwide grew by only 15% this year-is a concern to some, while others wonder if an excess in ethanol will exceed the public's consumption capacity while, at the same time raising the price of food staples necessary to both human and livestock survival.
Even changes within the ethanol industry itself, which is sprouting manufacturing plants in rural areas faster than new grass in spring, have fallen under scrutiny.
"Ethanol can be produced from anything that has sufficient cellulose," said Lamon, who also serves as board chairman of the Central City, Neb. facility of U.S. BioEnergy Corp., a leading ethanol producer based in St. Paul, Minn. "That includes wood chips, switchgrass, wheat straw, and even corn stalks. You can pull out the starch and sugars and produce ethanol."
Industry Matures, Things Change
As the industry matures, such mundane commodities could become cheaper alternatives to corn in producing ethanol, which is used to supplement the octane content in gasoline. Octane also can be produced from coal and oil shale.
Eventually, we may see more cheaply produced ethanol imported from other countries with an abundance of raw materials and cheaper labor, Lamon said.
"We're a free economy and you're going to see all kinds of research," he added. "The technology resulting from that research will change the nature of ethanol production fairly quickly."
For now, however, the U.S. farm economy will capitalize on the ethanol boom, largely to the benefit of AG credit unions, said Wehlage, who not only serves as his credit union's chief lender, but also farms 260 acres and raises 150 head of cattle with his brother.
Wehlage even sells part of his corn crop to the Central Minnesota Ethanol Cooperative in Little Falls.
"With crop prices up, I'm having a little bit of a challenge," Wehlage says of his agricultural operation. "I probably won't add any cattle this fall. I can get a lot more money for the crop itself without having to run it through any livestock."
Top 10 U.S. Corn Producers
State Bushels
Iowa 2,050,100
Illinois 1,817,450
Nebraska 1,178,000
Minnesota 1,102,850
Indiana 844,660
Ohio 470,640
Wisconsin 400,400
Missouri 362,940
Kansas 345,000
South Dakota 312,340
Source: USDA, Nass
Kernels About Corn
Acres Planted 78.3 million
Acres Harvested 70.6 million
Production 10.5 billion bushels
Average Yield 149.1 bushels per acre
Corn Crop Value $33.71 billion
Average Price $3.20 per bushel
One Bushel of Corn (56 lb.) Provides:
31.5 lb. of starch or
33 lb. of sweetener or
2.8 gallon of fuel ethanol or
22.4 lb. of PLA fiber/polymer
Plus: 13.5 lb. of gluten feed, 2.6 lb. of gluten meal and 1.5 lb. of corn oil
Source: USDA, Nass
READER RESOURCES
For more information on this story:
* www.archerccu.com
* www.centralmnfcu.org
* www.cuathome.coop
* www.mncun.org
* www.usbioenergy.net
* www.centralmnethanol.com
* usda.mannlib.cornell.edu/reports/nassr
