Thursday, February 9, 2017

The End of Scarcity in Agricultural Commodities Means Failing Farms in the U.S.

Excess aquifer-irrigated corn from 2016 crop (some uncovered) in Western Nebraska
photo: January 2017

All across our Heartland, corn sitting on the ground is a familiar sight. It is already February, many months post-harvest. There are abundant untold amounts of corn, soybeans, and wheat in storage, too.

The laws of supply and demand are wicked for the producer. The goal is efficiency for greater production to increase revenue, yet, the snake eats its tail, because greater efficiency leads to lower prices. As production rises in response to higher prices, the responding surplus supply means lower prices, once again, and today's enormous costs of industrial agricultural production are going unmet. Those who are the most leveraged are the first to fall in the most difficult of times, times that we refer to as boom and bust.

A recent article in the WSJ is titled "The Next American Farm Bust Is Upon Us; Shrinking role in global grain market coupled with a strong dollar and higher costs for seeds drives U.S. farmers out of business; overflowing bunkers". I encourage you to read it.

Global agricultural production dynamics are changing. Developing nations are industrializing their production. Export markets for the U.S. producer are shrinking. The ethanol policy ramp up in the U.S. beginning in 2008 had a global production ripple effect. There was a global frenzy to produce more of every agricultural commodity. It spurred purchases of ever-more-expensive farmland, $500,000 pieces of farm equipment, and high priced inputs.

Investors jumped into the game in droves as interest rates were rock bottom and they considered agriculture a "sure bet" for returns. The getting was good for a few years, but the bust from that time period is now setting in. Even though on the demand side we're burning 40% of our U.S. corn crop for fuel, we still have a gross oversupply of corn.

The WSJ article linked above tells us that "American farmers’ share of the global grain trade has fallen from 65% in the mid-1970s to 30% today." Global trade is affected by currency valuations, too, which have lately been unfavorable to U.S. producers. According to this WSJ article, one analyst predicts that it will be economically unviable for the U.S. to export wheat within five years.

Bales of corn stover to add to feed for industrial feedlot, Western Nebraska
photo: January 2017

The farm commodity subsidy systems of individual nations further complicates production incentives and outcomes. Europe struggles with trying to value the smaller farmer, greenspaces, and quality food production over free trade and export. A "quality over quantity" value system must be subsidized accordingly. In the U.S., on the other hand, we've subsidized large scale corn and soybean production for export and for fuel, for many years. We've prioritized efficient large scale production to "feed the world" over artisanal small farms and foods.

The food movement here in the U.S. has been a backlash against our "quantity over quality" mentality, and only because of the consumer, small and organic farms are gaining a foothold here, now such that it resembles Europe's food and farming value system just a bit more, especially surrounding urban areas.

Obesity has become the number one health problem in not only America, but in many other nations as well, due to the abundant cheap and processed addictive foods readily available to the majority of us.

Though some investment "gurus" have for many years been touting farmland as the best long term investment because "they're not making it anymore," those "gurus" were wrong because 180 million new acres went into production globally this past decade, and, in actuality, there are millions of acres more that could be cultivated in the future. U.S. farmers are facing serious competition from emerging grain production powerhouses. The ethanol commodity price surge was a short lived phenomenon due to supply and demand economics.

Western Nebraska Cattle Feedlot
photo: January 2017

If you've followed grain reports, or FAO food price reports, you would know that we've had ample and annual increases in global production of wheat, rice, corn, soybeans, and oils. Consequently, food commodity prices have fallen annually for five years. Though short term trends don't necessary dictate the future long term, in my opinion we are, as a collective whole, approaching the end of food scarcity.

Rapid technological advances, along with the way we eat, what we eat, and global industrialization are solving how to feed the world comfortably even with growing populations. Distribution is still key where food is scarce, and unstable governments cause food shortages, but production itself is adequate or in surplus supply and this overall trend will likely continue from here on out.

Doomsayers will disagree that now marks the end of scarcity because of changing weather, but I have faith in the ability to innovate and solve problems as our climate changes even if it means more indoor growing, and more crickets in our 3-D printed food and Soylent-like mixes. Laboratory meat production and other replication technologies will also play a role. Laboratory egg whites and milk are also in their early stages. Furthermore, the war on meat could reduce global grain demand in the future. The mantra that we need to double food production by 2050 is exaggerated.

The bottom line is that it is time to re-evaluate farm policy in the United States. We must ask ourselves what we are subsidizing? Piles of corn on the ground? Plowed prairies? Polluted waters? Drained wetlands? Endangered monarchs?

It is time to value our resources of soil, water, and biodiversity over production which we do not need and which causes needless hardship on our farmers and our natural world. Our farmer shouldn't be forced to work two jobs to make a living. Our farm families shouldn't live in food deserts. Rural communities need to be the focus of serious revitalization, especially considering the rate at which our country has grown in population.

One possibility is that by rewilding some areas, especially along rivers and wetlands, tourism and recreation could generate more revenue and vibrant communities than farming can. The visits to our national parks are growing greater each year. Tourism is a growing global industry. What if parts of our corn belt were returned to look more like it did to Lewis and Clark? There will be even more tourism in the future because robotics will make ever more leisure time for an ever greater number of people. Humans are starved for the outdoors, for areas where they can spend time in the natural world. We hunger for that which we've lost, our ability to connect with Nature.

A second possibility is that Generation Z (follows millennials) which now makes up 25% of our population will repopulate areas that are now out of favor. Dying rural areas could become a new affordable frontier offering opportunities to technologically connected people who do business in new ways, and desire to live in self reliant smaller communities powered by green energies, and who shun commuting for two hours a day in an urban rat race.

This nation is experiencing a modern day unrest. Farming and agriculture are a part of that. The existing, but old system, is begging for an update, for a new model. The time is ripe. Change is in the air.


Current amounts of grain in storage (estimates).

Slump in farmland values continues. Federal Reserve Bank of Kansas City. Banker Comments from the 10th District.

New Farmland values report from the 7th District - Chicago.

The Downturn in Agriculture: Implications for the Midwest and the Future of Farming. By David Oppedahl. Chicago Federal Reserve Bank.