It will end when operating margins revert back to historic norms. There is an old adage in the commodity business “ the higher the highs the lower the lows”. Ethanol will consume nearly 40% of the 12 to 13 billion bushel domestic corn crop; the remaining will be used for domestic consumption and exports. Domestic consumption is mainly comprised of feed for hogs, cattle, & poultry. I believe we export somewhere near 20% of our crop. On the ethanol issue it is not often you get a government subsidy and then a mandate of usage. There is one thing about relying on government policy; it changes.
Cost of inputs is near $550 per acre excluding land cost. Add in land cost of $250 to $350 and you arrive at $800 to $900 per acre. Divided that by the Dec 2012 cash price of $5.10 and they have a breakeven cost of 156 bu to 176 bu an acre. Most operators should have a 175 to 180 bu proven yield over the last ten years. Assuming they can protect up to 85% of that via crop insurance they can potential protect 153 bu. Two things the farmers are betting on; higher yields and higher prices.
Suppose you finance $4000 an acre on a purchase of $12,000. Sounds like a great deal low LTV with nearly 66% equity. Payments will be $321/acre based on 5% interest and 20 year amortization. Add in tax of $15 to $20 and your approaching $350 per acre for the next 20 years! These operators are layering in higher legacy cost at ultra low rates. Time will tell when the land bubble pops, I believe we have several more years. When it does happen they will be back peddling and you will see them running for more government programs to help them
