Drought Conditions Worsen as Corn Prices Skyrocket

Alex Tiller - Thursday, July 19, 2012

The US drought is intensifying, with almost 55% of the land area within the contiguous United States experiencing drought conditions – the sixth most widespread drought on record, second only to the 1930s “Dust Bowl” and the less well-known droughts of the mid-1950s. Satellite imagery confirms what common sense would predict; crop yields and plant health in the affected areas look very grim.

Farmers and ranchers are bracing for a bad year; corn and bean farmers will see high prices at the silo but will have poor yields. Ranchers are especially concerned because feed prices are going up while their own pasturage is brown and crumbling; early-season stock reports from major cattle centers indicate a large surge in animal sales as ranchers attempt to get out from under the looming feed bill.

In the short run, I would not expect to see huge fallout in the grocery store. Because corn is inexpensive to begin with, even a 50% increase in the price of corn translates into a 1% bump in a typical shopper’s grocery bill. (The increase this summer so far is 45%.) Meat prices are likely to be more volatile; there may be a bit of a bonanza for steak lovers in early days as a glutted beef market clears its stock, but later in the season and next year there may be less beef in the pipeline.

The drought exemplifies the need for prompt action on the 2011 farm bill, in my view – agricultural experts already estimate there will be more than $1 billion in crop insurance payouts in 2012. If those insurance programs aren’t renewed, it could leave a lot of farmers holding a very expensive bag.

Farm Bill Struggles in House of Representatives

Alex Tiller - Saturday, July 07, 2012

US Department of Agriculture head Tom Vilsack is pressing the House of Representatives to pass the farm bill that recently was approved by the Senate. The farm bill, a monster piece of legislation that is handled by Congress twice in each decade, is the basis of US agricultural policy, setting priorities for USDA research grants, crop and farm subsidies, food stamp and other food security program budgets, and disaster insurance coverage for farmers and ranchers.

Vilsack warned that without a bill, current disaster coverage provisions which are set to expire on September 30, 2012, would not be renewed, potentially leaving farmers and ranchers without government-provided coverage in the event of a natural disaster, crop failure, or other catastrophe. Republican leaders in the House express concern over the size of the farm bill (more than $500 billion) and fear that they might not have the votes to pass the omnibus spending measure in the current deficit-wary environment. The measure passed in the Senate by 64-35.

If the bill does not pass, an extension to the previous bill would be a likely compromise measure, but such an extension would not automatically extend disaster coverage. The new bill ends direct payments to farmers who do not plant any crops, redesigns a number of existing crop support programs, and is expected to cut the Federal deficit by modest amount over the next ten years.

House conservatives want cuts in the food stamp program, which by itself makes up about 80 percent of the farm bill’s $100 billion in annual spending. The Senate bill cuts about $4 billion over ten years, but Republicans want a larger cut in a program which has become controversial because of efforts by the Obama administration to actively recruit lower-income Americans onto the food stamp rolls. Republicans want the cuts increased to $14 or $15 billion over ten years.

An Agriculture committee vote on the bill is scheduled for July 11, 2012, and the Republican chair of the committee says he will try to get floor time for the bill following that meeting. Some GOP leaders want the bill delayed because if it is not enacted quickly it would likely become part of the year-end negotiations on budgetary issues, and at that time larger cuts would be easier to win at the bargaining table.

Los Grobo – A Farming Model of the Future?

Alex Tiller - Thursday, June 21, 2012

The second largest grain producer in Latin America generates revenue of about $550 million USD per year, produces or handles more than 2.6 million tons of grain per year, farms more than 617,000 acres every year, employs 900 staff people, 5000 farmers, and 4000 supply-chain workers…and does not own a single acre.

They don’t even own a tractor.

The company is named Los Grobo and is the end result of nearly a century of a family farming tradition among the Grobocopatel family of Argentina. Starting in 1920, the family patriarch began farming on a 15-acre land grant. Over the decades the family acquired more and more land, and eventually had more than 10,000 acres in production.

At that point, the family-based company (the subject of a fascinating Harvard Business School case study in 2010, readable here) began to make a major shift. Previously, the Grobocopatels, like farmers worldwide, had focused on acquiring more land, buying more equipment, and reinvesting profits into the farm itself. That changed when Gustavo Grobocopatel, at the ripe old age of 23, graduated from an agronomy program at the University of Buenos Aires and, together with his MBA wife, joined the family firm in 1984.

Gustavo (who still runs Los Grobo today) had a very different vision of farming than has been traditional among farm analysts – though it is a vision of farming that many farmers themselves might endorse. He does not believe that the financial strength of a farming enterprise comes from its land holdings, its supplier deals, its machinery and capital-intensive equipment. Rather, the enterprise’s strength comes from the knowledge and expertise of the farmers that work the land. It is a human-capital-centric business model that disdains land purchases and actively avoids investing in fixed capital – and instead hires the best agronomists, soil chemists, and other agricultural professionals it can find.

Los Grobo partners with 5,000 individual farmers, who own plots large and small throughout the southern half of South America. It sends its experts to help the farmers manage planting, herbicide and pesticide administration, financial transactions, sales, and all the other business details that go into a farmer’s life. The company directly leases some land and produces its own crops, but the bulk of its revenue (and about half of the enterprise’s considerable profits) comes from lease deals with these partners throughout South America. It leases the equipment it needs, where and when it needs it, and keeps fixed assets to an absolute minimum.

In addition, Los Grobo provides a wide range of management and consulting services to farmers, helping arrange financing, teaching best practices, etc. In fact, the company invested heavily in no-till agriculture back in the 1980s, pioneering this method of soil management and greatly increasing its profitability at the same time. The company’s employees spend their time managing the company’s own rented cropland, and more time out at the client farmers’ properties, both helping to manage the crop production as well as training the local farmers in the Los Grobo approach.

Is every farm destined to become a Los Grobo, or managed by one? Probably not. For one thing, the company maintains its profits in part by selecting the best farmers, with the best land, where it can make good deals and handle the supply chain in an efficient and cost-effective manner. However, I was drawn to the Los Grobo story because it seems to me that Gustavo hit onto something fundamental back in 1984, when other agricultural corporations were obsessing about land prices and trying to consolidate operations into giant megafarms:

It isn’t the farm. It’s the farmer.

Does Corn-Based Ethanol Increase Hunger?

Alex Tiller - Thursday, May 03, 2012

I talk occasionally about corn-based ethanol, and the various issues and controversies surrounding this use of agriculture to produce fuel. The questions aren’t simple, and the interplay of economic factors often lead us to counter-intuitive findings.

One such finding – despite the rhetoric of anti-corn ethanol activists, corn-based ethanol doesn’t actually drive up food prices or create hunger. In fact, if we stopped making ethanol from agricultural sources tomorrow, there would be MORE hunger! That’s because one of the most important components in food production and distribution costs is the cost of fuel.

Fuel is used by the farmer driving his tractor and combines. It’s used by the ships and trucks that move produce to market. And most critically, it’s used by the fertilizer industry in the production of modern fertilizers, the foundation stone of today’s incredible crop yields. If fuel prices go up, food-sector productivity goes down – particularly in the developing world, where fuel prices are higher because of a lack of infrastructure, and where trucks are used for inland distribution more than trains or ships.

Ethanol from corn has one important economic effect that is often ignored: it reduces the price of oil. There is insatiable demand for fossil fuels; advanced nations pursuing “green” economies are only slowing the increase in their use of fossil fuels, while the developing world is moving full-speed ahead towards more fossil fuel consumption. That means that any reduction in the supply of oil causes big price shocks as the countries that need oil for their economic survival bid up the price to get what IS available.

It’s hard to know for sure what the impact on oil prices would be if there was an end to ethanol, but a reasonable estimate is a 15% bump. That is an increase that would absolutely devastate food production in the developing world, where fertilizer prices are already high. If developing-world farmers have to pay even more for fertilizers, for many producers the economics of attempting high production just won’t make sense, and they will switch to subsistence farming to meet only local needs. The net result would be an enormous increase in hunger and a greatly increased need for food aid, with all of the deleterious effects that brings.

There are some reasonable arguments in favor of moving away from ethanol – but the food welfare of the developing world is not one of them. On balance, ethanol does those hungry people a service, by making the food they grow for themselves that much more affordable.