Enter the Food Chain

“We know there's not enough to last until next harvest, unless we slow the rate of consumption, that's the job of the market now.” 
                                      Darrel Good, agricultural economist, University of Illinois

The job Mr. Good is describing is raising food prices to keep you from eating so much.  Well, not you, maybe ...but somebody´s gonna miss a meal.  Meals got missed in Bangladesh, Egypt, and Mexico in 2008 resulting in riots.  The spread of last year´s Arab Spring is also attributed to going to bed without dinner in Cairo.  The UN is warning of higher global food prices and worries that grain exporting countries will close their gates to keep internal prices down ...but here´s the bad news: there´s no good news.

It´s hard to know where to start describing this year´s global food situation ...so in no particular order:

Corn

Last year I reported that corn prices had reached an all-time record of U$7.62/bushel ...it´s now U$8.09/bushel after hitting another all-time record of $8.44 a couple of days ago.

Why pop in prices?  Drought has destroyed about half of one of the biggest US corn crops ever planted.  It´s being called a "train wreck."  Prices have risen 50% in the last two months.

Why the sudden drop back to $8.09?  Market experts believe that other corn producing countries will pick up the slack.  Who is the Number 2 corn-exporting nation?  Argentina.  Trouble is, the corn crop here is down almost 20%.  Pablo of Pancho Villa Tortillas tells me that their corn prices have doubled in the last 3 weeks alone.  So many farmers have lost their corn crops in Argentina that there are worries that they won´t have enough cash flow to plant again.

Wheat

The shortage of corn, among other things, are pushing up prices for wheat. Prices in London and Paris have risen by a third as wheat is diverted to animal feed.  Bread quality wheat is up 40% in the UK which fears its own wheat crop could fail this year due to too much rain.  US wheat prices surged last month to their highest levels since 2008 before easing last week.

Yesterday, the USDA lowered its world wheat inventory forecast to 177.17 million metric tons, down from its July estimate of 182.44 million ...but insists that world supplies remain at manageable levels.

Let´s hope that the USDA forcast is not counting on Argentina, South America´s biggest producer and what was the world´s 6th largest exporter.   Argentina capped exports of wheat in an effort to keep local prices down.  This left wheat farmers here with no place to sell their grain.  Internal prices have dropped to under U$200 a ton ...compared with last week's international price of U$345.  Once one of the world´s greatest breadbaskets, Argentina now plants less wheat than anytime in its modern history.

What are wheat farmers planting in Argentina now?  Barley, which is not currently subject to controls.  Good news for beer drinkers?  Naah, not really.  Most of the barley will be of the animal feed variety and destined to be a replacement for scarce corn.

Soy

The devastating drought in the US has also shrunk the size of the soy crop ...so much so that Brazil has now taken over the USA #1 spot for the first time.  Prices are at record levels even after easing a bit from last month´s all-time record of 17.49 per bushel.

Meat prices will be affected by the lowest soy stockpiles in nine years ...with this year´s crop too small too low to replentish them.  China has bought so much Brazilian soy that ranchers there have tried to import soy for their animals from Bolivia and Paraguay ...problem is: there is no more soy in Bolivia nor Paraguay.

At the sametime, soy is also used as fuel.  Soybean oil accounts for 90% of US biodiesel stocks.

Beef

We´ve saved the worst for last.  The beef industry in the US is devasted.  Last year´s incredible drought concentrated in Texas and Oklahoma pushed the cattle industry to the brink.  The price of hay was driven to all-time highs as ranchers trucked-in any available supplies from neighboring states at huge transportation costs. Beef animals (with a brutally high percentage of females) were liquidated before they could die in the fields ...if possible.  The situation was almost identical to the Argentine drought of 2007-2008 which shrunk the number of ranchers and cattle ...but set the stage for a smaller national herd and higher prices at the ranch gate.

This year´s more generalized drought in the US caused wildfires on grasslands from New Mexico to Montana ...in addition to crippling the grain supply for animals.  In what looks to be a permanent shift, the hikes in grain prices and biofuel mandates also drove a majority of hay producers to row crops.

Ranchers expecting that last year´s reduction in cow numbers would boost profitability are staring at balance sheets which have taken a hit, and cash flow which has moved sharply negative.  Long-term, well-established and successful US producers now talk openly about getting out of the cattle business.

Beef in Argentina no longer appears on the radar.  Beef exports have fallen by more than half every year since 2010.  Now, both Uruguay and Paraguay export more beef.  Quality and quantity have suffered ...but more on Argentine beef another time!

Water

Yep, you can´t have food without it.  In the most disgusting of drought related news, in what I hope to GOD is not a sickening portent of even worse years to come, is this report from Kansas.  Oil companies, in dire need of water for their hydrofracking operations, are now competing for water with drought-striken farmers.

Argentina´s oil industry is also beginning to elbow into agriculture.  And, of course, there´s the mining industry ...where water is more precious than gold.

Conclusion?

Beats me.  The strange thing about this year´s food crisis is that the price of oil is not a factor as it was in 2007/2008. Maybe it´s time to heed the UN's call for an internation discussion on food for biofuels.  Maybe we should re-visit the use of water resources for fracking.  Maybe we need to adjust our diets to better reflect climate change.  Maybe we should prohibit food commodity speculation.  Your thoughts?