Friday, January 30, 2009

Look what I found

I found this manifesto that I wrote in October of last year attempting to give some perspective to the global issue of food prices and hopefully get some dialogue going. Alas I never put it up on here and it has languished on my jumpdrive for months. I really do not approve of the demonizing of corn, grain anything by the media or anyone else that has never had to make there living off the land. The most unsustainable thing about agricultural systems is that they are forced to feed 6-7 BILLION mouths

Ok, first I would like to address the concept of food as fuel in reference to the ongoing debate of how corn influences the price of other commodities. First, corn is not food. Corn has not been food for about 20 years. That does not mean that we do not consume corn, but rather that we use corn indirectly for many different things that happen to include food products. Rather, corn (No. 2 yellow dent corn, the most ubiquitous grain in the world) is a feedstock for cattle, swine, poultry, ethanol plants, HFCS (high fructose corn syrup), corn starch, and thousands of other end uses. Corn does not sit around plotting how to make people fat, it does not conspire to influence market prices nor does it contribute to the decline of rural communities, it is just corn. Grain is the reason we stopped being hunter gatherers. It allowed us to stay in one location and know that we would have adequate food reserves to last the winter. It is the stuff civilizations are made of. It keeps for extended periods of time; it is portable, fermentable, and consumable.
In the last few years it has been in high demand as energy prices have climbed. As energy prices climbed it became more and more profitable to produce bio-fuels, and thus ethanol plants were able to spend more money to buy corn (enter the laws of supply and demand). This increased demand in the market meant that animal feeding operations were squeezed as far as how much corn they could afford to compete for in the open market. So many of the feeding operations turned to other grains to help formulate a balanced ration, thus creating greater demands for these other grains (wheat, soybeans, sorghum) which also helped drive up the costs of grains in general. So lets look at the changes in grain prices of a few different grains in the past year based on prices published in The NY Times Futures index (10-21-08).

Grain Current Price $/lb Lifetime High $/lb this year
Corn .07 .15
Wheat .10 .23
Rough Rice* .15 .22
Rough rice is un-hulled rice that is not fit for human consumption until it is milled thus adding to the cost of a staple food.
Based on Dec. delivery.

Think about those numbers… the past year we have seen commodity prices double and fall back down again. However, did we see the cost of a loaf of bread hit $6 dollars? No, bread stayed around $2.79 (here in KS) throughout the year. So what is the big deal?
Well, in nations that are classified as having extreme levels of malnutrition depend greatly upon whole grains like rice and sorghum for nourishment. These grains are consumed directly, and are not milled and turned into a value added product(bread). So while millers and bakers may have been able to adsorb the increase in wheat, in developing countries, the super poor (living on less than a dollar a day) are faced with the fact that their primary food product just doubled in price. It is not a pleasant situation. To get a good idea of how hunger changes spatially over time check this out.
The discussion about how our nation addresses hunger in other countries is best saved for another day (when we talk about farm programs). Bottom line, the costs of farm commodities have largely mirrored that of our crude oil over the past year.

Energy Current price Lifetime high(within last year)
Light Sweet Crude 74.39$/barrel 148.03
Heating oil 2.22$/gal 4.28
Natural Gas 7.21$/mm btu 14.54
So this begs the question, which went up first, the price of energy or the price of food commodities? There are a lot of different economists that have lots of initials after their last names that are arguing about this so I will let them sort this out. Just wanted to give you all some numbers and perspective before I jump in and start beating the bio-fuel drum.

Bio-fuels are nothing new. The prototype internal compression ignition engine that Rudolph Diesel designed ran on peanut oil. Pretty much any oilseed crop (soybeans, canola, peanuts, sesame, safflower, nuts etc) can be pressed for oil, and the resulting meal is generally fed to livestock or slathered on a loaf of bread, complimented by jam and a glass of milk (peanut butter). Bio-fuels from oilseed crops are a great way to make use of all of the parts of a grain. That is not to say that corn ethanol is not readily utilized, rather it is just not as simple and low tech as the pressing of oil seeds.
Now the idea of cellulosic ethanol has raised lots of questions as to how efficiently we can expect to produce a biological fuel in a previous article found here:
One of the quotes that I found rather disturbing was this one.
“Obviously, farmers benefit—if governments allow them to keep the gains. In America, the world's biggest agricultural exporter, net farm income this year will be $87 billion, 50% more than the average of the past ten years. The prairie farmers of the Midwest are looking forward to their Caribbean cruises.”
That statement is a little misleading, and I will tell you why. Over the last ten years grain prices have been extremely low. How low, you ask? I can remember selling old crop corn in 2004 for $1.50 per bushel. That means that then corn was selling for about 1/5th of this year high prices at that point in time. Needless to say, the early part of this century was not a good time to be in grain production regardless of whether or not you participated in federal farm programs (ie. Subsidies, which are whole nother can of worms).
Farming is not a guaranteed source of income. The only people complaining about high grain prices are those on salary, whose income is static year to year. Some years will be better than others. This year is going to be one of the years that pull a lot of producers up out of the red on the balance sheets. I had an Ag Econ. Professor tell me once that the greater the risk (of an investment), the greater the reward. This was when corn was $1.50, and I told him he was full of crap. Well, turns out he was right (Which is why he, Fayte Brewer, is the president of Purdue Alumni Seed Co.) Over the long term, farming is a very risky business, and I doubt that anyone that has ever had to sit across from a banker when grain was $1.50/bu and land payments were due will begrudge high grain prices.
From a soil fertility stand point I think that cellulosic ethanol has a place in American agriculture, however it also has the potential to defile our nations natural resources. High biomass crops like switchgrass, photoperiod sensitive sorghum, sweet sorghum, and even sugar cane, all remove huge amounts of phosphorus and potassium from the soil. Research that has been done here in KS indicates that up too 300 lbs of P and K can be removed per acre. If these nutrients are not replaced after cropping it is commonly referred to as nutrient mining. Nutrient mining is not such a big deal if there is an excess of the nutrient in the soil, however it is a problem if you are dealing with marginal land, like ground that was taken out of CRP (Conservation Reserve Program). An area that could benefit from this high level of nutrient removal is surrounding confined animal feeding operations (cattle feedlots, swine facilities, or poultry houses). Most states require these confined animal feeding operations to file a nutrient management plan to comply with currents laws (so they do not apply too much crap). One of the problems with this is that over long periods of time soil nutrient levels can reach excessive levels (>700 ppm) after long periods of manure applications and increase the risk of runoff and the entailing eutrophication. Cellulosic ethanol, with its high levels of nutrient removal can help to remove these excess levels of soil nutrients, however these crops still require large amounts of nutrients


Brad said...

I've never had a corn and wheat induced headache until just now!

Paul said...

Thanks Josh, nice to hear another perspective.

jdstamp said...

I tried to paste it from word documents and it munched up my formating in the charts. The bottom line is that grain prices move with energy prices.