Three Key Trends
Since the mid-90s, one of the things I loved about my work is that I get to talk regularly with farmers from all over the country. Over that time period, the topics of conversastion have changed quite a bit. Fifteen years ago, Midwestern Grain Farmers “in the know” were excited about the global economy… that’s right. Large-scale grain exports to Asa were going to go on forever & I was as likely to hear stats on China’s GDP growth as you were in a farmer focus group as you were to thoughtful farmers as you were to hear guesses on whether or not Mark McGwire would break Roger Maris’ single-season home run record.
Then a couple of years later, the talk was all about biotechnology and how a handful of companies, led by Monsanto, were going to control global agriculture. Roundup Ready® and bT technologies had been huge successes by commercial standards & the talk was about “terminator gene” that over time would turn farmers into little more than the hired hands of the global seed companies. The furor was particularly strong and long-lasting in predominately cotton growing regions.
For the last two years, the talk has largely been about prices…. on both sides of the farm gate (i.e., input
s and grain prices). Like everyone else in the US, farmers had the opportunity to live through what was certainly the most volatile economic period we’ve seen in many decades. It came out of the blue and impacted everything from fertilizer and land prices to interest rates for operating loans.
From all of the conversations I’ve had changes that I’ve heard discussed by farmers since the mid-90s, I guess there are threethemes that we should only ignore at our own peril. I believe that these are likely to ensure that the dramatic volatility we’ve seen in the past 24 months becomes “business as usual.”
Rising populations and living standards
According to the World Bank, the world’s population should grow by roughly one billion by 2020. Moreover, of the 6.8 billion people that are already here, 1.8 billion of them will achieve “middle class” living standards. The Population Resource Center estimates that this will cause demand for animal protein to double within the next ten years.
If true, these themes may have profound impacts on grain demand. It takes eight pounds of grain to raise a pound of beef. Therefore, more grain is going to be shifted toward animal agriculture, with higher commodity prices the likely result as marginal acreage is pulled into production on an opportunistic basis.
Consumers Matter
In a market-driven economy, consumers get to decide what is important. I learned this firsthand when I was CFO of NaturMark Potatoes, a division of Monsanto. Things were going fine until Greenpeace did a masterful job of sowing fear of biotechnology. We at NatureMark were “tone deaf” and went on our merry way until McDonalds (who purchases more than one out of every five US potatoes) announced that there would be “no GMOs” in McFries. Needless to say, that announcement provided me with a good opportunity to become a consultant.
Consumers are now flexing their muscles with regard to animal welfare initiatives. But it’s not just consumer fears that impact demand in our business. Remember the Atkins Diet? That was great for Smithfield and Tyson affiliates and cattlemen all over the country, but wheat growers and bakeries were miserable. Organics are also continuing to take market share among more affluent households.
Water is Becoming THE Key Input
Water rights have been an issue in the American West for years, but as animal agriculture requirements expand, it’s fast becoming a global issue. Today, agriculture uses roughly 3/4 of all freshwater utilization….. and that’s with largely vegetarian diets in Asia. Last year’s increase in Chinese water usage was equivalent to Europe’s total annual water consumption.
While this is not intended to be a scholarly paper, thhese themes and others combine to create volatility in everything agriculture touches. Whether it’s an operating loan, fetrilizer and see costs or grain prices, nothing exists in a vacuum anymore. There’s certainly plenty to worry about, but I have noticed that two groups of farmers seem to worry less than all of the others:
- Those with low debt obligations
- Those with downstream ties
I assume that low debt obligations are self-explanatory. If you don’t owe much, not as much has to go right to keep your operation afloat. But the downstream ties theme is less obvious.
The relationship that FritoLay has with its contract growers is the most harmonious I’ve seen. There is a great deal of open information-sharing both ways and the growers have the peace of mind that comes from knowing that your costs are covered. This is in direct contrast with the volatility in the fresh potato market that makes grain futures look stable.
I’m not suggesting that everybody growing #2 yellow dent corn can arrange for a contrct with Tyson Foods. I am however, suggesting that many of us could seek to offload some risk by finding a dependable buyer that can get added value from our products. This obviously could mean different things to different people in different places, but it provides a cushion from some of the volatility we’ve seen, and are likely to continue dealing with in the markets for some time.