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Post by 48 on Aug 24, 2011 11:46:40 GMT -5
Kub's Den
How the Value of a Penny Changes
Elaine Kub Contributing Analyst
Bio
Tue Aug 23, 2011 08:26 AM CDT
My folks bought a brand new 3/4-ton diesel Ford pickup in 1986 for $15,000 and it's still running strong. Dad still uses it every once in awhile to tow a trailer full of cows to the auction barn. However, the late '80s -- a time of fierce drought, $2.50 spring wheat and 60-cent cattle -- was not an easy time for anyone to be farming. I must have overheard some conversation about how expensive the truck was, because I remember my 3-year-old self proudly walking up to Mother with a heaping handful of pennies "to help pay for the pickup."
Inflation-adjusted corn and crude oil prices. (Chart by Elaine Kub)
In my mind then and as I remember it now, those pennies had a lot of value. As it happens, they really were worth more then than they are now. Let's say my little hands held 30 pennies. Those same 30 pennies from 1986, adjusted for the past 25 years of inflation, would be worth $0.62 in August 2011. Think of it this way: if a candy bar cost thirty cents back then, today the same candy bar would have to be worth $0.62 to account for how the value of all the goods and services that go into the creation of a candy bar have changed, and to account for how the purchasing power of the dollar itself has changed over time. Conversely, if we took the worth of our dollars in 2011 into a time machine and travelled back to 1983, for instance, it would take $7.27 in our dollars to buy the same bushel of corn that could have been bought for $3.21 by someone paying with 1983 dollars. Similarly, U.S. consumers were paying for crude oil with a $30 per barrel price tag in 1983, but that value today would be equivalent to $69 per barrel in inflated 2011 dollars. Live cattle, which have moved from $45 per cwt to $115 per cwt in nominal terms over the past 38 years, have actually posted a steep downtrend in inflation-adjusted terms: from $231 per cwt in 1973 to $115 per cwt in 2011-equivalent dollars. Gold is another commodity whose recent highs seem less impressive once they're adjusted for inflation: the monthly average price in 1980 is equivalent to $1,664 per ounce in 2011 dollars, and at its peak on January 21, 1980 ($875 per troy ounce) it was equivalent to $2,399 per ounce today. Going back to the grains -- even if we ignore the Russian grain crisis fueled '70's -- $8.88 hard red winter wheat (the average inflation-adjusted price during 1982) or $16.14 soybeans (the average 1983 price in 2011 dollars) isn't as impressive or frustrating as it might seem through the lens of today's situation. On the one hand, there are more people and more global demand than ever before and meanwhile not really that much more land in production. On the other hand, technology has helped increase yields, but not enough to keep us from operating at some of the tightest stocks-to-use ratios in history. Yes, our supply chain infrastructure has grown efficient enough to shield the world from some of the pain that would otherwise be experienced by such tight inventories. But still -- long-term economically speaking -- shouldn't we be seeing some of the highest prices ever, even in inflation-adjusted terms? To answer that, consider that "inflation" generally means rising prices across a broad sector of goods and services in an economy. It can be both bad and good -- bad in the sense that saved dollars lose purchasing power or good in that it encourages economic projects. When it's measured by the U.S. Bureau of Labor Statistics' Consumer Price Index (CPI), as I have done in the previous examples, it sets each time period's value according to a monthly index of the "prices paid by urban consumers for a representative basket of goods and services." Basically, these are the consumers who today have to eventually buy bread made from $8 wheat, or ethanol made from $7 corn, or beef fed with $7 corn, or poultry or fish fed with $350 soybean meal.
So when we push against old highs on the inflation-adjusted chart, we push against the consumers' demonstrated ability to pay with equivalent money in the past. If they weren't able to sustain those values in the past, what allows them now -- in the midst of what many economists are calling a double-dip recession -- to sustain them again? And if they can't, that means these price levels won't be supported for long no matter how bad the crops' yields may have been affected by the summer's heat. For what it's worth, it looks like corn has a better history of demonstrated willingness to pay around today's inflation-adjusted price levels than crude oil does. But if it cheers us up a little bit to have grain prices inflated, we must also consider that input costs will inflate at roughly the same rate. That's why, even though all this is all old news, it's always interesting when prices get to historic levels to actually compare them against real historic terms.
It's also very timely to take a look at inflation during a week when the U.S. Federal Reserve might -- and I emphasize "might" -- look into pumping hundreds of billions more dollars into the economy under the banner of Quantitative Easing, Version 3. By definition, inflation also occurs whenever there is more money in circulation. So if Ben Bernanke steps to the podium on Friday in Jackson Hole, Wyo., and delivers what the stock market has been asking for -- QE3 -- it truly will take more dollars, at a cheaper value per dollar -- to buy a bushel of anything. My 30 cents in 1986 will start to look bigger and bigger.
(CZ/BS)
© Copyright 2011 DTN/The Progressive Farmer, A Telvent Brand. All rights reserved.
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Post by 48 on Aug 24, 2011 11:56:28 GMT -5
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Post by 48 on Aug 24, 2011 12:03:32 GMT -5
I tried to post DTN's graph of corn vs crude oil vs CPI, but it didn't work. Maybe DTN has it blocked. If you want to post a picture, it's ....right??? WTF? You type bracket img URL bracket slash img Correct?
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Post by Grainbelt on Aug 26, 2011 11:33:59 GMT -5
Well OBG......appears you have called the train wreck that the ethanol mandate has the potential to cause, dead on. I am an ethanol supporter and knew the mandate could be a deathnell.
November gasoline $2.73 November Ethanol $2.82 November Crude $85 December Corn $7.60
Corn producers need to be aware of the risks they face out there. One click of a pen and the markets could be allowed to adjust to appropriate levels. Ethanol often trades to a 15% discount to RBOB. $2.60 RBOB and $2.20 ethanol doesn't support $7.50 corn.
Then again, maybe they'll just allow the legislation to run its course and no matter how short the crop, upwards of 43% of the available corn supply will be "forced" into the ethanol market, and corn and supermarket prices will be allowed to soar. Place your bets.......
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Post by villageidiot on Aug 26, 2011 12:10:32 GMT -5
Where's DEC to tell us all he told us so, lol.
I plan to get pretty much sold on two-thirds of my expected bu. next week. After the ball beating I've taken on the pigs the last 4 years, I just can't afford to walk away from these kind of prices.
Probably will get to 20% sold on next 2 years as well
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Post by villageidiot on Aug 26, 2011 12:34:47 GMT -5
ETHANOL IS A BOONDOOGLE, YOU BUNCH OF HILLBILLES !!!!!
well someone had to say it.
We needed to find a use for 3.5 billion bu. of corn, unfortunately we outdid ourselves.
A friend who works for Farm bureau, with some political connections said the gov. wants out of the crp program, and expects it to be a program the commission on debt reduction wants axed. How many acres is that going to put back in to production?
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Post by looter on Aug 26, 2011 12:49:49 GMT -5
Well OBG......appears you have called the train wreck that the ethanol mandate has the potential to cause, dead on. I am an ethanol supporter and knew the mandate could be a deathnell. November gasoline $2.73 November Ethanol $2.82 November Crude $85 December Corn $7.60 Corn producers need to be aware of the risks they face out there. One click of a pen and the markets could be allowed to adjust to appropriate levels. Ethanol often trades to a 15% discount to RBOB. $2.60 RBOB and $2.20 ethanol doesn't support $7.50 corn. Then again, maybe they'll just allow the legislation to run its course and no matter how short the crop, upwards of 43% of the available corn supply will be "forced" into the ethanol market, and corn and supermarket prices will be allowed to soar. Place your bets....... Amen. The political shock waves this deal will cause is unknowable. The thing I find alarming is how asleep-at-the-switch farmers are on this subject. The vast majority of producers do not understand how the end of the BTC and the new higher mandate levels are going to change the game dramatically. There is no doubt what will happen if the mandate isn't altered. The question on everyone's mind should be "how soon and how much will they drop the mandate?" My hunch is that it will be a calamity before the pols act. They will overact once they finally do. Buy YOUNG cows. Buy MANY young cows. If you can access stranded forage, life will become easier once the inevitable happens.
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Post by 48 on Aug 26, 2011 14:03:54 GMT -5
I think you guys are being a little melodramatic. Ethanol has traded at a sizable discount to gasoline for a long time. The first time it comes to par with gasoline, you guys are saying the sky is falling. lol.
As I have posted many times, the law provides for a waiver to the mandate if there is a short crop.
Inflation...not ethanol...is the reason for the rising prices of everything.
Peak Oil is a fact, and corn ethanol can easily supply 15% of our liquid fuel needs without impacting food.
Cattle is a whole different story. Herds are at 50 year lows. The Texas Drought herd liquidation just made the problem even more acute. You can buy top of the line cow-calf in TX. It's amazing that the temporary TX Drought oversupply has not crashed the LC market, but exports are good...finally recovering from the Canadian Holstein BSE fiasco that killed our export markets.
Just make sure you have...Winter Feed. You have to raise your own feed to supplement milo/corn stalks when they are full of snow. You can not buy feed. That won't work.
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Post by looter on Aug 26, 2011 14:37:36 GMT -5
I think you guys are being a little melodramatic. Ethanol has traded at a sizable discount to gasoline for a long time. The first time it comes to par with gasoline, you guys are saying the sky is falling. lol. As I have posted many times, the law provides for a waiver to the mandate if there is a short crop. Inflation...not ethanol...is the reason for the rising prices of everything. Peak Oil is a fact, and corn ethanol can easily supply 15% of our liquid fuel needs without impacting food. Cattle is a whole different story. Herds are at 50 year lows. The Texas Drought herd liquidation just made the problem even more acute. You can buy top of the line cow-calf in TX. It's amazing that the temporary TX Drought oversupply has not crashed the LC market, but exports are good...finally recovering from the Canadian Holstein BSE fiasco that killed our export markets. Just make sure you have...Winter Feed. You have to raise your own feed to supplement milo/corn stalks when they are full of snow. You can not buy feed. That won't work. Some people like me will look at the mandate on one side and a sub-par corn crop on the other and conclude the mandate will become relevant for the first time since 2006. Folks in this camp think that folks will scream when they can't afford to mix caviar with MAC n Cheese at the pump. Other people think the govt will wisely drop the mandate very soon. Otherwise they must think the corn fairy will wave a magic wand and make everything ok. Time will tell who is right. Something to consider.... A person might want to take a look at the corn vs wheat spread next July?
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Post by glowplug on Aug 26, 2011 20:26:54 GMT -5
Well I told you guys so on agweb for a year that we needed an early release on the non-HEL CRP acres.
But it will take until year 2 of farming those CRP acres before you get a decent crop. Idealy we'd get an early release in Sept. , get to mow down the cover there and be able to glyphos-2 4D the crap at spring green up. Then no till in it if possible.
But noooooooooo, our govt. likes to pay landowners for their own private hunting preserves.
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Post by villageidiot on Aug 26, 2011 22:42:14 GMT -5
What will be interesting will be the consumer choice involved.
Remember years ago when the ethanol blend and the unleaded were more closely priced, with unleaded being cheaper than the blend at times. This hasn't happened for some time.
I can remember the guy at the coop telling me it doesn't matter to 2/3's of the people what the product is, they buy the cheaper one. When regular unlead is cheaper, we sell 80% unleaded , and when the ethanol blend is cheaper, we sell 80% of blend.
Will be interesting to see how the public votes when the ethanol blend is the high priced option, given the assumption that the price of corn, and the loss of tax credits.
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Post by looter on Aug 27, 2011 13:06:25 GMT -5
What will be interesting will be the consumer choice involved. Remember years ago when the ethanol blend and the unleaded were more closely priced, with unleaded being cheaper than the blend at times. This hasn't happened for some time. I can remember the guy at the coop telling me it doesn't matter to 2/3's of the people what the product is, they buy the cheaper one. When regular unlead is cheaper, we sell 80% unleaded , and when the ethanol blend is cheaper, we sell 80% of blend. Will be interesting to see how the public votes when the ethanol blend is the high priced option, given the assumption that the price of corn, and the loss of tax credits. You bring up a great point. It's more Rube Goldberg menagerie of weirdness. The thing is, Blenders are forced to buy a minimum of ethanol volume.... or they can't buy gasoline. So expect nozzle covers labeled "unavailable" at the unleaded pump. It's that or else the blenders will try to pass along the higher priced ethanol by jacking up unleaded price. At any rate the consumer has no choice. By law, the FIRST 4 billion bushels and rising goes to ethanol. Ethanol demand is only elastic when production exceeds the mandate as it did from 2006 until recently. Once production falls to mandate, ethanol demand has zero elasticity. This means that 100% of all rationing must be done by livestock and export sectors. What will consumers think of that?
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Post by 48 on Aug 27, 2011 13:30:37 GMT -5
Consumers will go for cheap fuel every time. In 2008 when the Big Specs pushed crude to 147 and corn to almost 8, consumers didn't go ballistic over food. They went ballistic over $4 gasoline. The CFTC instituted hearings and crude collapsed.
In Food vs Fuel, Fuel wins every time.
BTW...if you asked the American consumer if he wants a shortage of fuel so we can keep exporting corn to people who hate our guts, the American consumer will vote to cut corn...food...exports every time. Well...duh!
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Post by glowplug on Aug 27, 2011 22:01:17 GMT -5
If obamunist doesn't know that high priced gas is a noose around his 2012 election neck, his advisors do know it.
He's caught in the web of his own making. Appeasing the enviro-wackos by keeping a lid on new offshore and ANWR drilling permits. Bomber Ben and Turbotax Tim are printing more money, inflating the dollar so OPECkers demand and get higher priced oil just to stay even with what the dollar's purchasing power is. Consumers seeing high priced goods and groceries due to the transportation costs of getting product on store shelves.
Only a matter of the next election when voters will kick the chair out from under him.
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Post by kcm on Aug 27, 2011 22:43:05 GMT -5
I'll agree with you GP that the CRP has become nothing more than a subsidy for doctors and lawyers who like to hunt. Every square foot of farmland in our county was eligible for this last signup, even the very best river bottom which we have precious little of. The CRP was fine when it was for the HEL land.
In this area the government pissed away more money this spring by trying to get everyone to plant forbs in their CRP, and paying them to burn it, something we do every year anyway(not me, I took mine out of the CRP years ago, everyone burns grass in the spring without having the government pay them to do it).
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