Sunday, June 29, 2008

The human face of demand destruction...

I think we have reached the tipping point for the pork industry. And it is worse than I feared.

I received this e-mail from a hog producer who won't be buying any more $7 corn.
My wife and I are in our Mid 40's with two garde school boys that work on the farm as much as we do. After graduating from college I worked in Ag Business for 10 years before returning to the farm full time. During our 21 years of marriage we have purchased 387 acres and paid it off. We were able to build swine contract grower facilities and paid them off. Two years ago we started a 1200 sow unit, Mortgaged our other assets and secured a contract with a farm family two counties away to finish the pigs. On June 12, 2008, we were notified not to ship pigs on Friday as they could no longer pay for them. Now we are faced with a cash price of $10-$12 per head instead of the contract price of near $50. Working capital ceased to exist. As I have been up front with our Cooperative Lending Firm, I notified our lender of our inability to make our monthly payment. We have never missed a payment in 21 years. His suggestion was to sell all of our land, liquidated our sows and seek off farm employment. 30 Days earlier he told up " they're in it for the long haul." To bad our Cooperative Bank is no longer interested in livestock loans. We are looking at liquidation. My youngest son is in the first year of 4-H and doesn't want to attend the fair next week because he is afraid this lender will repo his garden and puppy. We are hearing of generational livestock family farms in our community that do not know if they will survive the summer. The loan officer has a FSA guarantee on our loan, the crop farmers have the LDP safety net, and we have nothing but speculators driving us off the farm. We need action now as we can't wait for congress to deliberate for weeks. The war between hog farmers, crop farmers and loan officers has begun. It is to bad we are the first casualty.
This is only one anecdotal data point, of course. [If any of you have other stories , please forward them to me] But my early read is lenders are panicking and leaping to harsh financial triage that at the very least seems at odds to the words of commitment and trust that have flowed at annual meetings and customer appreciation days where I have spoken.

Meanwhile, another front is becoming more active in our battle with our best customers.
A debate is raging within the state and nation's agriculture industry about the high costs of food and how much ethanol is contributing to it.

With Nebraska feedlot owners facing feed costs of as much as $300 per head, Nebraska Cattlemen is asking the U.S. Environmental Protection Agency to reduce the nation's renewable fuel standard (RFS) within the Clean Air Act to 4.5 billion gallons.

On the other hand, Nebraska Farm Bureau is urging EPA to deny the recent request from the State of Texas for a waiver of the Renewable Fuels Standard (RFS). [More]
Grain farmers are not only getting rich, they have effectively decided to join with food critics and lower our meat consumption.

11 comments:

Anonymous said...

This has happened many times the past few decades, and every time the cycle continues until other people expand newer or bigger livestock operations and grain demand is stronger than ever.

It should also be pointed out that livestock feeders benefited from the LDP. They were spoiled by cheap grain. We crop farmers allowed them to almost steal the corn. They would not have had grain at below production costs if not for LDP. Without LDP less grain would have been on the market and the price would rise to a market level. Livestock feeders are so spoiled by a government program to keep grain cheap that they do not know how to act when required to pay a free market price of the true value of the grain. Complicating the matter is the fact that the dollar is loosing strength .

I do worry about the economy as a whole, but anecdotal stories of people quitting livestock is nothing new.

John Phipps said...

Anon:

You are quite right about LDP's. That particular market distortion I think accounts for much of the inertia of the meat sector while mandates were being set in place.

I am less sanguine about this being a just another livestock cycle. There are no consumer dollars to pay for the amount of meat we presently consume at prices that would make $7 feed corn acceptable, and little reason to think incomes will expand for enough people fast enough for meat consumption not to be significantly reduced. Moreover, I think it could drag on for long enough to fundamentally alter eating habits.

The livestock sector is already highly concentrated. What we are seeing is contractors for very large operations folding. To consolidate our way out of this would be very difficult with the increasing problems of siting and cost of mammoth facilities. To simply install another operator in failed operations would require contracting entities - which is the link collapsing now - not bottom level pig farmers.

Anonymous said...

The people in developing nations are eating more meat because they have slightly more money. Even with a recession we are much wealthier than developing nations and we can export meat.

Also there is an obesity epidemic here. Many of my neighbors should be cutting back even if money is no object.

I know you could be right, but I have hope that things will work out.

Brian in Ohio said...

John,
You're pretty keyed up about ethanol, but what would the price of corn, soy, crude oil, DAP, and retail gasoline be today if the blenders' credit, tariff, and mandate had never happened? All would still be at historic highs, with oil/fert/gas somewhat higher and corn/soy somewhat lower. And the markets would still be in the process of destroying demand, because that is exactly what today's market fundamentals require.
Food and energy commodities typically cycle through periods of scarcity and surplus. Many personal lifestyle and government policy decisions were made during the past based on the assumption that surpluses were the norm and would continue. This is obviously not the case now, and time will tell how long this scarcity will continue, but never before in history has the world allowed markets to function to the extent they are now in allocating these scarce resources. Government policy, ours and other nations', becomes one more fundamental, but it is the market that is ruling, at least for the moment.
Food and energy are just different variations of the same general organic molecules. Biofuels simply closes the gap between the two, but the inextricable relationship remains regardless. The notion of food vs. fuel is a false dichotomy. Whether they are BTU's or calories, they get burned and you cannot have $140 crude oil without corn ultimately ending up at a similar stratospheric price.
I agree that the corn growers have a public relations nightmare on their hands, but hysteria from within agriculture will help no one. This deal is much bigger than just closing a few ethanol plants.
And finally yes, the market is absolutely screaming that current world demand for meat is unsustainable, at least in the short run. That will translate into some tough decisions for many.

John Phipps said...

Anon:

My read is ethanol would not have made it out the gate without subsidies guaranteeing them. Investors simply saw a sure thing. At the least, we would not have built plants in such number as fast, which means the meat industry would have not faced a step change in price to adjust to.

Regardless the plants are there and the industry robust enough to stand on its own. This is an opportunity to drop the rebates, mandates, and tariffs with little economic cost. While too late for those who have "tough decisions" as you delicately framed it, it at least would disarm many of our critics.

As for prices, corn and soy would be higher but lower than today. Oil sets its won path, but DAP would find an equilibrium level incorporating lower US demand, just as will occur next year as anyway.

I also think intolerance of differing opinion within our industry is tellingly defensive. Your definition of agriculture is remarkably corn-soy-centric. While it may be all about us, I strongly doubt it.

I find the clinical detachment of corn growers unfortunate. We certainly didn't hide behind abstract economics when making the case for LDP's for millionaires. Such refusal to identify with customers strikes me as obnoxious short term and self-defeating in the long run.

Anonymous said...

There is no current free market at work. With mandates and tariffs it is just as supported as when LDP's were in effect. Strip out the tariffs and import from Brazil, reduce the blender's credit and drop the RFS, yes drop it, to allow ethanol to function on its own. If it truly will help as a fuel then it will via the market.

Brian in OH said...

John,
The limitations of the format are apparent as we talk past each other, but I still appreciate the open forum.

It's interesting that you perceive me as "corn-soy-centric" given that half of what I grow is fed to my livestock and some of the "tough decisions" are my own.

And, apparently you don't buy my contention that scarce and expensive energy inexorably leads to scarce and expensive feed/food. I don't know if $4.70 diesel/heating oil arrived there via a "step" or not, but the adjustment is still painful.

The key point I was trying to make is that global commodity markets are functioning effectively, with various gov't policies serving as one more set of significant, but not overwhelming, fundamentals

Which leads to this: the real impetus for my comment had nothing to do with econ arguments, but with the irony of you posting the anecdotal "human face" commentary. This is a tactic of the left (the term bleeding heart comes to mind) and in another context could be used effectively against your anti-subsidy platform. How many times have I read and admired the case you make for US agriculture to be more market, and less gov't, driven. Well John, this is the global market, rationing scarce resources in a clinical, detached manner.

Maybe in the next farm bill, in exchange for the elimination of subsidies, you can get a provision that mandates group therapy sessions for farmers so that we are better at feeling each others' pain.

With affection.

Brian in IL said...

Brian in OH,

I posted the most recent anon entry but thought since we are of great minds (as stated in the names we share) I should reveal my identity. I am curious how we are in a current free market? Just because the LDP and other subsidy programs are not in effect due to the prices of crops how are we not subsidized through the back door via the import tariff on ethanol and the blender's credit, not to mention the RFS?

Please don't take this as punchy, just a conversational question.

John Phipps said...

Brian:

I work increasingly from anecdote for two reasons - that's where money is now made, and I have developed a better appreciation for pattern recognition skills (not that I likely have them) buried deep in our brains.

Waiting until ag stats come out is useless in today's agriculture, especially since they are so slow. Example: the census of ag.

I suggest the market is working to allocate a scarce resource right now, but that resource was made scarce in large part by an artificial and arbitrary demand that was clearly to the detriment of the meat industry.

And I believe I have belabored my point that both my subsidies and ethanol's have no value or purpose (and never have).

You may be right about my new sentimentality, but as someone I can't track down said, "If you are liberal as a youth and conservative as an oldster, you are living life backwards."

I'm not for smoothing everyone's path, just for not using government to allow a few to put stones in others' way.

I also have discovered people are less fungible than I previously thought.

Anonymous said...

Maybe we should just make ethanol when we have a clear surplus of corn. Have a "target price" for corn of around $4. I understand that moth balling an ethanol plant is not as easy as turning off the lights. Moth balling a hog farm is not practical either.

I sure won't pay as much for a pork chop as I occasionally pay now for a rib eye.

Anonymous said...

John,

Please tell your hog producer writer that there will be a good life for he and his family after farming. And you don't need a farm to raise children that are respectful and taught a work ethic. Sometimes fate goes against our wishes. This is a family that sounds like they did everything right, just a case of unlucky timing. Yes, I have no doubt tears will be shed in that household. But, they also sound to be of rare stock. There is a world out there that needs people like this.