Tuesday, February 2, 2010

Biofuels and Farm Prices

The chart above shows the price of corn on the right scale (data from the USDA), and the fraction of the US corn crop convertible to ethanol by the capacity of ethanol plants in production on the right scale.  Obviously, biofuels are not the only influence on corn prices, but clearly it's likely to be the main influence behind the price spike in 2007-2008, and also why prices have continued to be above the historical levels through the worst recession since the great depression (in late 2008 and 2009).  An excellent thing for grain farmers.

Not so great for livestock farmers, or eaters, though, since the corn crop was previously mainly used for animal feed.  This next chart shows the changes in the price of corn, but also hogs and milk, with all three series rescaled to 1.0 in January 2000.  As you can see, while the price of corn spiked, the price of animal products did not climb to the same heights, and fell to the low end of the historical range during the great recession.

So the ratio of animal product prices to corn prices, which obviously is a key thing if you are an industrial livestock farmer, reached very low levels in 2008-2009:

Unfortunately, feed is the single largest cost input for livestock farmers. For example, looking at the cost input data for milk, which only goes through 2008:

You can see that once milk prices went down with the recession, but feed prices fell much less, these guys were doomed.  Sure enough, if you google "dairy bankruptcy", you can find lots of stories like this:
The filing for bankruptcy protection Thursday by the largest dairy in Weld County is a sign of the times for the industry, a Colorado State University specialist said Thursday.

Johnson Dairy filed for Chapter 11 bankruptcy protection in a Denver court. According to the Rocky Mountain News, the company east of Eaton listed debts between $50 million and $100 million and assets of less than $50 million. John Johnson was not available for comment, but an official with the New Frontier Bank of Greeley, which partially finances Johnson, confirmed the filing.

Bill Wailes, the head of the animal sciences department at CSU and a dairy specialist, said Johnson’s move is a sign of the condition the industry presently finds itself in. There is not much of a chance for improvement on the immediate horizon, he said.
or this, in my own county:
Joseph “Joey” Mendoza walks slowly through an empty milking barn at his 150-year-old dairy down the road from the Point Reyes Lighthouse.

Mendoza, 65, a third-generation dairyman, sold his 489 dairy cows three weeks ago as part of a national program that seeks to ease what many are calling the worst milk crisis in 70 years.

More than 100,000 cows were sent to slaughter under a program developed by the National Milk Producers Federation. Milk prices remain depressed, and program officials recently announced another “herd retirement” that seeks to remove roughly 100,000 more animals from milk production by paying up to $1,500 per cow.

For Mendoza, whose grandfather came to the Point Reyes area to milk cows at the turn of the last century, the decision to sell his Holsteins was especially painful. He called it necessary to pay off creditors and to stop the months of financial losses caused by high feed costs and low milk prices. Those prices seem tied to a slump in exports.
Eventually, enough dairy farmers will got out of business that the remaining ones will have the pricing power to pass the higher cost of feed through to consumers.


TJ said...

yeah feed cost have hurt a lot of farmers. Here in Canada the impact of higher cdn dollar has made it a double edge sword. Pig farmers got slaughtered, beef is out in the pasture and milk farmers have the quata system, otherwise they would be gone...

Pops said...

As usual, this goes way beyond simple supply and demand.

All aspects of ag are distorted, from export subsidies and price supports to "breeding for transport" and "mialbox farming". By far my biggest worry is the continuing pressure farmers to economize by consolidating around mono-cropping - both geographically and genetically.

Not only are we building a food system totally dependent on FFs for fuel and fertilizer, we are concentrating on fewer and fewer varieties of crops and growing them monolithically not only on the farm level but on the regional and global level.

A staggeringly amount of infrastructure has been built trusting the fuel will always be available to transport the finished product worldwide.

Stuart Staniford said...

Pops - in terms of the "massive blight destabilizes food production" risk associated with monocultures, the last case like that I can think of was the Irish potato famine in the 19th century. Are there more recent examples?

Pops said...

The potato famine is the perfect example of how vulnerable monocultures are to pests of whatever kind. But it also shows how infrastructure and even social institutions can be built up around a crop when the local climate, soil conditions, etc are particularly favorable for that crop.

The Irish specialized in potatoes to their detriment but the cost was only to them. Today, the entire world is becoming dependent on regional specialization and of course global transport.

It comes as no surprise the US imports lots of bananas and beer (nos 2 & 3) but who would guess our number one import is hogs? At number 4 is cattle, then wheat, oats and sugar at no 7.

30 years ago our top imports were sugar, bananas and coffee.

I'm not talking about overnight armageddon here but a real problem of adjustment if transportation fuel costs continue the climb of the last decade.


Stuart Staniford said...

Right now I'm not even slightly worried about the idea of grain farmers not being able to afford fuel, the reverse seems to be the situation - grain farmers are doing much better than they have for several decades. I expect that to continue as long as society is big on the biofuel thing.