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Thursday, November 3, 2011

On the Growing Global Grain Supplies and Our Secretary of Agriculture's Plan

This morning I updated the charts under the tabs across the top of this blog for "wheat", "corn", "rice", and "soybeans" five-year futures.

Guess what? Every single one of these commodities has gone in price down since I did the last update mid-July. And that was a pretty significant time period, since it marks the end of the growing season in the world's number one Ag-exporting North American grain belt.

And as I write this, I see the new Bloomberg headline:

Wheat, Corn Drop on Signs of Increasing World, U.S. Production. The article begins... Wheat and corn futures fell on signs that grain supplies may be ample as countries around the world step up production.

People have very short memories, but try to back up to the beginning of this year when everyone was so bullish on Ag commodities. I felt I was a lone voice in the wilderness fairly confident about global grain supplies/production.

In this thread I will rerun what I said last April, March and January, as it is all relevant, yet, today. Many times I have stated that we have growing global competition in Ag commodity production, overproduction, in fact. That is the reason the U.S. corn ethanol policy began in the first place, to add some price support to U.S. corn producers as well as being a make-work project.

I continue to think that U.S. and global biofuel policies are the number one threat to global food security as climate events and fossil fuel issues become more problematic and that . . .

As we burn more of our U.S. crop production for fuel, expect the rest of the world to continue to pick up our export market share, while we continue to drive up our own food prices at the local supermarket.

I was extremely dismayed when I listened to Tom Vilsack's five minute interview from last Friday on Market-to-Market, as it was largely about future ethanol production, and how we would like to power our Navy, Air Force, and commercial jetliners using biofuels.... I kid you not, while adding that money is not there for conservation measures and showing a video of baling corn stover.

Everyone else in politics is short sighted, why should our Secretary of Agriculture be any different?
——Kay McDonald

A Comment About the Lower Food Price Index (April 8, 2011)

What a difference a couple of months makes. During the past 24 hours "everybody" is reporting the food price index drop, the first in eight months, from the monthly FAO report. There has been much fear-mongering from the media over the past six months about the world running out of food. Perhaps, so much so, that the general public accepts this as a given. Furthermore, some have assumed that the Russian wheat crop failure and other events last year were a sure sign that climate change was destroying agricultural production rapidly, though the Russian crop failure had other causes according to NASA.

If one has gone beyond the headlines, the FAO reports were not really that alarming since the high prices were coming from sugar and oils and corn use being diverted to ethanol causing the coarse grains index to rise. Most importantly, rice and wheat supplies have looked adequate.

This month, according to the FAO food price index report, stocks-to-use ratios of world cereals, wheat, and rice all went up since a month ago. Coarse grains remained unchanged. There are even rumblings of wheat supplies surpassing expectations which will lead to lower wheat prices, in spite of the U.S. harvest being poor this season. Let's face it, we are still the world's grain producer powerhouse, but we have some growing global competition.

It is tough overcoming common prevailing wisdom, or myth-busting of the media, but I continue to sense that we have growing global grain production beyond what is necessary to feed the growing populations, along with advancements in addressing the real problems of feeding people, that is storage and distribution with waste reduction.

This is why I have gone from being certain that the ethanol program would be discontinued on moral grounds of contributing to global high food prices, to thinking today's farmers couldn't tolerate the loss of ethanol's grain price support which it now affords the agricultural system. In the mean time, it is supplying 10% of our liquid fuels, something that is becoming embedded into our transportation system.

So, I will reiterate my recent statement:
I'd like to think that it is very possible that the biggest surprise of this current decade is that we will continue to have overproduction of agricultural commodities while making strides to solve food security issues of storage, transport, distribution, waste reduction, and affordability. My top concerns on the horizon are the oil supply, weather, and tenuous macroeconomic conditions.
Of course, I might be wrong.


Global Food Security Now and Later (March 23, 2011)

I was invited to participate in a discussion precipitated by Andrew Revkin for the NYT's Dot Earth today, so I am posting my response to the group, below. The question was to react to Tom Vilsack's Op-Ed article in yesterday's Financial Times, "How to Avoid a Global Food Price Crisis" and to comment on the value of stocks-to-use ratios as a measure of food security.

__________________


Although I don't want to oversimplify the complex factors involved on the subject of global food security, there is a useful tool that is helpful in roughly assessing the food supply, and that is the stocks to use ratio. For those unfamiliar with the term, this ratio measures "excess of supply against demand" or "the level of carryover stock for any given commodity as a percentage of the total use of the commodity." The level at which this ratio results in concern and price increases varies by commodity. Corn and soybeans tolerate a lower excess supply before concern results, for example.

Using this measure, we see that rice, which was at a very comfortable supply level last year, is in even greater supply now, with a stocks to use level of 29.9 as compared to 24.9 in 2007/2008. The latest information on wheat is looking better, given some good weather luck in the FSU this season. According to the FAO, "World wheat production in 2011 will rise 3.4% to 676.0m tonnes, thanks to a 'favourable outlook' presented by higher sowings and more benign weather." The wheat stocks to use is at 28.5, as compared to 22.4 in 2007/2008. These are the two most important commodities for use as human food and supply looks nonalarmist for each, barring weather or other catastrophe.

It was evident in Vilsack's Op-Ed for the Financial Times that his goal is to carry out Obama's desire to increase the U.S.'s agricultural exports while downplaying the role that the U.S. ethanol policy plays on global food security. The coarse grains shortage we are experiencing is most entirely due to corn ethanol policy in the U.S., not a production problem. Last year, 15% of global corn production went to produce ethanol in the U.S. High corn prices result in higher meat, dairy, wheat, and soy for consumers.

The U.S. seems to be embracing ethanol and DDGS export markets, so it is possible that this irrational policy will continue ...until it can't. Higher fuel costs weigh twice as heavily on corn than on soybean production, and less yet, for wheat production. As fuel costs go up, and they will, we will grow less corn and graduate toward crops and livestock methods that use lower energy inputs. In the mean time, instead of expecting the policy to be discontinued, expect policy changes that will do a better job at hiding ethanol price supports, and a possible cap on production near today's level.

As I see food insecure nations buying up farmland across the globe in rapidly increasing amounts, I see the desire to bring a large number of new acres into production along with plans to build the necessary infrastructure required. Tractor and equipment sales are strong, storage facilities are increasing in Saudi Arabia and other food insecure nations, and irrigation methods requiring less water are being promoted. Rapid seed technology advancements are on the horizon for boosting both security of crop production and food nutrition.

Brazil, a net food importer in the 70's has become the world's third largest agricultural exporter today. The FAO expects Brazil's output to increase as much as 40% this decade, which could more than meet increased global agricultural demand requirements. Lester Brown may have to wait another decade, yet, for his predictions to come true. On the other hand, if we have rapidly increasing extreme weather events due to climate change, oil supply disruptions and/or ever higher energy prices, poor government policy choices, ongoing economic meltdowns causing political unrest and food inflation, they might come true much sooner.

I'd like to think that it is very possible that the biggest surprise of this current decade is that we will continue to have overproduction of agricultural commodities while making strides to solve food security issues of storage, transport, distribution, waste reduction, and affordability. My top concerns on the horizon are the oil supply, weather, and tenuous macroeconomic conditions. I am cynical about human nature when it comes to prospects for soil and biodiversity preservation, as well as climate change mitigations.


Countering the Prevailing Myth that "The World is Running Out of Food" (January 17, 2011)

photo
*The Pannonian Plain (photo source)

One thing that is easy to notice when reading as much main stream news covering agriculture as I do is that the subjects related to food supply are often hyped and over-dramatized. Every time there is a weather event, or a commodity that goes up in price the media cries "the world will be unable to feed itself" or "we are running out of food".

Recently, high food prices have been in the forefront of news headlines. However, if one looks more closely at the FAO food index, it is sugar, oils and coarse grains which have made the basket more expensive. Rice, a staple which feeds 60% of the world's population is in adequate supply and costs half as much as it did during the 2008 food scare. Wheat stocks also remain well above 2008 levels although soybean and wheat prices are rising.

Corn ethanol policy, not true food scarcity, is the key driver in the high coarse grains price index. In other words, the food is being produced and is theoretically available, but its chosen use is not as food at this time. It is greatly concerning that global biofuel production is taking many acres of production away from global food supplies and raising overall food prices.

High food prices due to economic conditions in Asia and other nations are real and I don't want to underestimate the access to affordable food being a common goal for all as well as an important contributor to stability of governments everywhere. A favorite agriculture quote of mine is “Civilization and anarchy are only seven meals apart," by Julian Cribb.

On the negative side of prospects for global food production and security, we have fears of high oil prices and/or shortages if alternate farming methods are not widely adopted since they cannot be set up overnight. We have concerns of fertilizer availability and affordability. We have the climate change extreme weather events and temperature changes coming at us though we don't know for sure how this will affect production. We have currently unsustainable practices such as overuse of limited water resources and topsoil loss. We have the biofuels policy debate yet to play out. Last, but not least, we have national and global macro economic condition factors which dictate agriculture policy, trade, affordability of food, affordability of farm inputs, and oil prices.

Next, let's look at the reasons for a very positive outlook on global food security.

Last week, Scientific American published an article about the bright future of food, reporting on two French studies which concluded that the current hyperbole coming at us constantly about running out of food to feed the world's growing populations is a myth. Even though it would be an environmentalist's nightmare, it stated that there are major reserves of potential farmland across the globe which could increase production land from 1.5 billion hectares to 4 billion cultivated hectares, especially in Africa and Latin America.

A year ago, in my article titled "The World Could Feed 14 Billion People" I stated that the areas of concern are "economics, government agricultural policy, storage, refrigeration, and distribution." The fact is, we produce way more than enough food to feed everyone today. There is a great deal of slack in the system. Today's government agricultural policies promote overproduction. Food waste is forty percent in some industrialized nations. The real questions related to feeding everyone on the planet are whether food is affordable and whether the infrastructure is there to store and distribute it.

In the year since I wrote that article, it seems that the trend of African (and other) farmland acquisition investments globally are leading towards the needed infrastructure upgrades which will enhance food distribution. Middle Eastern oil-rich nations which cannot feed themselves, such as Saudi Arabia, have a vested interest in seeing these projects through. Deere and Caterpillar are selling equipment at record levels to get the work done.

Grain storage including steel storage bin sales are increasing around the world. Genetic technology in plant science is rapidly advancing both nutrient quality and weather tolerance in food crops. The ever increasing and diversified number of national global producers and exporters of grains and other foods are adding to overall global food security. Perhaps, instead of reducing food production, climate change will make vast swaths of warmer and wetter northern Canada and Russia increasingly productive.

All in all, it seems very possible that the biggest surprise in agriculture going forward this coming decade is that we will not be running out of food as our global populations grow. The media just might have to find a new subject to grab the headlines.

1 comment:

  1. When I read this, I said to myself that surely land prices would be falling. I was wrong.

    Take a look at this Carroll County Iowa land sale on November 1 for the astronomical price of $12,600/acre. This was a very productive 80 acre parcel with a CSR of 84.7 . So the average price/acre/CSR paid was $148. I think prices were only averaging about $101 late last winter.

    http://www.hfmgt.com/divisions/realestate/auctions.php#results

    ReplyDelete