It sounds illogical. A farm bill that provides “government-sponsored insurance, counter-cyclical assistance, disaster aid and legacy payments tied to nothing, the five-year $307 billion bill lavishes cash on wealthy farm households, the main restriction on collecting it being a means test that applies to couples making more than $1.5m a year,” according to an article entitled: A Harvest of Disgrace, published by the Economist, can not possibly relate to anyone in the metals industry. Or can it?
I can write a whole diatribe on the “can you believe it” aspects of this ridiculous bill (now law) passed by Congress, vetoed by the President but overridden by Congress. As if US farmers of corn, wheat, rice, soybeans or cotton are hurting in today’s market! It sounds like big steel. But I digress. True confession – I didn’t really see an obvious angle to write about the US farm bill and the metals markets. That was, until my learned colleague Stuart called me this morning – as part of some due diligence that we are doing on behalf of a client.
We have been in discussions with a number of metal distributors (steel distributors to be specific) to clarify commercial terms. These discussions, as all sourcing ones go, involve things like lead times from distributors and validity of quotations and such. When and not shockingly I may add, we hear that much of the demand for steel products is coming from a gas pipeline project and ship-building, it made me scratch my head. I wonder how much steel is going into say, ethanol plants? According to this article from Ethanol Producer, “Everything is made out of it [carbon steel and stainless]: tanks, vessels, equipment. When those double in price, your plants have to go up [in cost] a minimum of 15 [percent] to 20 percent.” And the average price of an ethanol plant is $60m. So steel is a big portion of the total cost of an ethanol plant!
So after a little research I discovered that this lovely little farm bill provides for a 45-cent-per-gallon subsidy for ethanol from corn. “We’ll be putting a third of our corn crop this year into ethanol – 90 million acres of agricultural land,” according to an article written by Jim Matheson, who represents Utah’s 2nd Congressional District in the U.S. House of Representatives. According to Matheson, US ethanol policy does not make a whole lot of sense as it takes more energy to produce than it returns.
Well that’s just wonderful. And now you wonder why all of the steel producers are so busy? Well, they are busy supplying these ethanol plants here is a list among other plants. And that my friends, is how the farm bill affects steel buyers. So much for $.03/ear corn this year…