Bankers find 'adventure' at IBA annual meeting in Des Moines

Northwestern Financial Review, Oct 15-Oct 31, 2007 by Bengtson, Tom

The theme of the 121st Iowa Bankers Association convention was "Looking for Adventure." Comments from speakers at the Sept. 17-18 event in Des Moines suggest they won't have to go very far to find it.

Wells Fargo economist Michael Swanson told bankers the ethanol bubble is about to burst, while former Congressman James Leach and pundit David Gergen expressed concerns about the political future of our country.

Consultant Ken Schmidt further brought the convention theme to life with his insight into marketing, based on years as director of communications for the Harley-Davidson Motor Company.

"We are going to see our first financial crisis in ethanol in the next six to 12 months. It is going to be a rude awakening for a lot of ethanol plants," said Swanson, the speaker at the annual agricultural breakfast, which kicked off the convention. Although the ethanol industry produced handsome profits in 2006, Swanson said the outlook for the coming year isn't nearly so bright.

As oxygenate MTBE was phased out, ethanol consumption soared last year. Swanson, however, sees no reason for ethanol demand to increase substantially in the near future. Although historically ethanol has traded on commodity exchanges at a price about 50 cents per gallon higher than gasoline, ethanol currently is trading at a price about 50 cents a gallon below the price of gasoline. Swanson said to get more ethanol in the market, "you are going to have to discount it steeply."

Swanson reported that although the number of highway miles driven by Americans is holding steady at about 3 trillion miles per year, the U.S. Department of Agriculture is predicting a 55 percent increase in corn utilization for ethanol next year. Swanson said he doesn't see how that will happen.

The new demand for corn created by the ethanol plants is raising the price of corn, probably on a permanent basis, Swanson said. In the near term, however, there is not enough demand for ethanol to keep all the plants running at capacity. He predicted many plants will run at half capacity or less; many plants will change ownership as the market shakes out.

Swanson explained that the price of corn is now related to the price of oil. "Now you have to worry about Exxon-Mobile and OPEC," he said. 'It makes it much more difficult to keep your marketing scheme up to snuff."

The higher the price of gasoline, the more producers can charge for ethanol and pay for corn. Swanson said gas prices are related to the price of oil. If China continues to buy oil at current rates, Swanson said, the price of oil could go to $100 per barrel, and the price of ethanol and corn will rise. If the Chinese demand tapers off, so will pricing for ethanol and corn.

Land values are affected by the price of corn, Swanson said. Given the weak dollar and low interest rates, Swanson said he expects farm land prices to increase before they begin to decline to historically typical levels. "Farm land prices are going to go up yet again, but no cycle lasts forever." he said.

Cloudy world view

Harvard University colleagues James Leach and David Gergen delivered similar, brooding messages about the United States and its geopolitical prospects. "It looks as if the war [in Iraq] is going to cost several trillion dollars by the time all the expenses are added," Leach, the former Iowa Congressman, said via taped audio. "The loss of respect for the United States in the world has great ramification for trade and economics and many other factors.

"We are in unbelievable, unstable times. You have in Iraq a possibility that is higher than might be expected that this war might spread to Iran.. .and you have the possibility that terrorism could spread again to our shores."

Gergen also lamented the country's foibles in Iraq. "The situation in Iraq is heating up," he said, suggesting that President Bush may be tempted to take military action in Iran. "The next president is going to inherit the agonies of Iraq, the danger in Iran and growing instability in Pakistan, potential instability in Saudi Arabia, and the lingering problems of the Israelis and Palestinians. Given the seriousness of the issues, the next president is going to have to spend 60 to 70 percent of their time on foreign policy issues."

Speculating about the next president, Gergen said enormous issues will surface in the next few years. In 2010, he said, the Bush tax cuts expire and that will inspire a big debate over taxes. He said a Democrat in the White House will want to raise those rates, claiming the money is needed to fund health care initiatives. Gergen said he expects the top personal tax rate to increase to 39 percent from the current 34 percent. Furthermore, he expects a reinstatement of the inheritance tax, with an exemption on the first $3.5 million or $7 million per couple.

"The more troubling issue will be on capital gains," he said. He predicted they will be raised to 20 percent or 25 percent from the current 15 percent.

Gergen asked the bankers to indicate who they thought would win the Iowa Caucus. Overwhelmingly, by a show of hands, the bankers said Mitt Romney will be the Republican candidate and Hillary Clinton will be the Democratic candidate. Gergen said a Roraney victory in Iowa will make the campaign a two person race with Rudy Giuliani. A Clinton victory in Iowa, he said, clinches the nomination for her.