Under the impression that rising crop price are driven mainly by rising demand? Rising costs suggest that crop production won't rise fast in response to higher prices.
"The price of crops drove what farmers did last year," said Chad Hart, an Iowa State University agriculture economist. Now "it's costs, and that's prompting farmers to reevaluate how they allocate their land this year."
The cost of farming an acre of corn, for example, has risen almost 47% over the last year, according to Wells Fargo & Co. estimates, outpacing the 35% increase in the price of corn in the same period.
It's the same with rice. The price on the futures market of U.S.-grown long grain rice -- the type that is in short supply worldwide -- has risen 64% this year to $22.74 per one hundred pounds. (Such a move also pushes up the price of medium grain rice, which makes up most of what is grown in California.) Still, farmers are expected to plant 549,000 acres of California rice this year, up less than 3% from last year, according to the U.S. Department of Agriculture.
The fact that the cost of farming an acre of corn went up faster than the price of corn makes me think that corn's Energy Return On Energy Invested (EROEI) is rather low. How much of that corn inputs cost increase comes from nitrogen fertilizer whose production is very energy intensive or other chemicals whose production is very energy intensive?
That higher cost of production combined with high prices for wheat and soy are combining to restrict corn plantings. In spite of rising demand for corn for both food and ethanol and a huge increase in prices the amount of corn planted in the United States in 2008 will go down.
Farmers are now expected to plant 86 million acres of corn this year, the Department of Agriculture predicted March 31, down 8 percent from last year, which was the highest since World War II.
Soy doesn't need nitrogen fertilizer since soy roots cooperate with bacteria to fix hydrogen to nitrogen to produce ammonia. The USDA March 2008 plantings report shows some signs of the effects of the high cost of ammonia fertilizer with a shift toward soy and away from corn.
The March 31 report says farmers in all but one U.S. state intend to plant more soybeans this year.
An estimated 75 million acres will be dedicated to the crop, an 18 percent jump from 2007. The U.S. is the world's No. 1 soybean producer.
An acre of corn might yield 160 bushels. Each bushel of corn has about 400,000 BTU of energy (less or more depending on whether you use it for heating or eating). So what happens to total produced available human caloric energy when crops shift from corn to soy? Acreage planted in soybeans might yield 30-43 bushels per acre (depending on whether irrigated). We get 60 lbs per bushel of soy and 17,035 BTU per pound. That is about 1 million BTU per bushel which is higher than the 400,000 or so BTU per bushel of corn. But since land produces only a quarter the number of bushels per acre of soybeans as compared to corn the result is less energy produced per acre. Less energy in. Less energy out. The problem for us is that as we gradually lose the ability to use fossil fuels to produce ammonia fertilizer our crop yields will drop.
The cost of nitrogen fertilizers will likely go much higher as fossil fuels costs continue to rise. But what about other types of fertilizer? A Fortune article about Canadian potash mining company Mosaic reveals expansion of potash mines takes many years.
All this begs a key question: Won't rising demand and sky-high prices lead to new fertilizer supply coming online and eventually to lower prices? Over time, it probably will. But the barriers to entry for newcomers are high. The mine shaft in Esterhazy cost $50 million when it was completed in 1962. "To replicate that today would be $500 million--just to put the shaft down," says Prokopanko. "And it's going to take you five years minimum to develop a new mine complex and a mill and all the infrastructure. Total, it would probably cost you $2.5 billion." (Mosaic recently announced mine-expansion plans that will increase its annual potash production from 10 million metric tons to 17 million, a project expected to cost $3.2 billion over 12 years.)
But in the bigger scheme of things $2.5 billion is not a lot of money. Phosphate and potassium production can probably scale up to meet growing demand - albeit with a delay until big capital expenditures bring new production capacity on line. But ammonia's big price run-up is driven by fossil fuels price increases and the relief there is harder to imagine.
What I'd like to know about the long term cost of nitrogen fertilizer: How much higher does nitrogen fertilizer cost need to rise before electricity as a power source for generating nitrogen fertilizer would become cost competitive? That price, whatever it is, represents the longer term ceiling on nitrogen fertilizer prices.
Maumee agribusiness The Andersons Inc. raised its price for diammonium phosphate farm fertilizer by 177 percent in the last 1½ years.
A short ton, which cost $260 in October, 2006, was $721 in February.
“Fertilizer prices continue to soar. It seems like they just keep going up and up and up,” Mr. Durham, the Henry County farmer, said.
As a result, a March 1 survey by the Ag Department’s Ohio office showed state farmers will plant 3.35 million acres of corn this year, a decrease of 13 percent from last year.
Meanwhile, planting of soybeans, which produce their own nitrogen, will be up 8 percent.
Farmers across the country are expected to plant 8 percent fewer acres in corn this year than in 2007, but Pennsylvania farmers will plant 1 percent more corn than last year, according to a crops expert in Penn State's College of Agricultural Sciences.
A recent NCGA white paper reported that natural gas, which supplies hydrogen for the production of ammonia and has historically accounted for 70 percent of the cost of ammonia production, has seen its price quadruple since 1999 -- from $2 to $8 per million BTUs, ballooning its share of the total ammonia production cost to 85 to 90 percent. Since then, 26 ammonia plants have closed and U.S. production capacity has decreased by 40 percent.
The report also accounts how transportation and distribution costs have jumped, driving up the price of nitrogen since the U.S. has turned to global sources. Ocean freight fees rose from 300 percent to 400 percent from January 2003 to 2008, and shipping anhydrous ammonia by rail has almost doubled since January 2005.
Edward Yardeni, made famous for calling the big 1990s bull market in advance, claims the flow of capital into agriculture will cut crop prices.
TORONTO — Market strategist Ed Yardeni, who made a name for himself with accurate calls on the U.S. stock market's bull runs of recent decades, says that soaring food prices won't last because farmers are rushing to plant more crops and agricultural productivity is increasing with new investment.
“There's so much capital now that's going to pour into agriculture that I think food prices are going to come down sharply,” Mr. Yardeni said at a presentation Wednesday morning sponsored by Thomson Reuters Academy.
That only works if costs do not keep pace with prices. Well, our really big question for your consideration: Will farm costs keep pace with rising food demand from industrializing Asia?
The Financial Times reports the Chinese government wants the Chinese to buy lots of farmland in other countries in order to boost production to feed China.
Chinese companies will be encouraged to buy farmland abroad, particularly in Africa and South America, to help guarantee food security under a plan being considered by Beijing.
A proposal drafted by the Ministry of Agriculture would make supporting offshore land acquisition by domestic agricultural companies a central government policy. Beijing already has similar policies to boost offshore investment by state-owned banks, manufacturers and oil companies, but offshore agricultural investment has so far been limited to a few small projects.
Industrialization causes higher demand for food which causes higher food prices which causes a flood of capital to go into agriculture. The result? Less land for animals. More pollution from agriculture.
But this plan only works if the target countries allow export of the increased production.
Argentina has banned beef exports, while Egypt and India have stopped shipments of rice.
Kazakhstan has prohibited wheat exports. Russia has slapped a 40pc export duty on shipments, and Pakistan a 35pc duty.
China, Cambodia, Malaysia, Philipines, Sri Lanka, and Vietnam have all imposed export controls or forms of rationing to ease the crisis.
Instead, Asia is increasingly transforming farmland into office parks and suburbs. In the Philippines, half of irrigated land has been transformed into urban development in the past two decades. While this fuels new economic engines such as services and industry, it also undercuts resources needed to grow food.
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The population in the Philippines has grown by roughly 2 percent a year since 2000, one of the highest rates in Asia, leading to a corresponding leap in rice consumption. And across Asia, exploding middle classes with more money and bigger appetites are eating more rice – and more meat. Meat production requires huge amounts of water, labor, and grains to feed cattle, which in turn diverts resources away from rice production.
Why have food prices rocketed? Paradoxically, this squeeze on the poorest has come about as a result of the success of globalization in reducing world poverty. As China develops, helped by its massive exports to our markets, millions of Chinese households have started to eat better. Better means not just more food but more meat, the new luxury. But to produce a kilo of meat takes six kilos of grain. Livestock reared for meat to be consumed in Asia are now eating the grain that would previously have been eaten by the African poor. So what is the remedy?
The best solution to a problem is often not closely related to its cause (a proposition that that might be recognized in the climate change debate). China’s long march to prosperity is something to celebrate. The remedy to high food prices is to increase food supply, something that is entirely feasible. The most realistic way to raise global supply is to replicate the Brazilian model of large, technologically sophisticated agro-companies supplying for the world market. To give one remarkable example, the time between harvesting one crop and planting the next, in effect the downtime for land, has been reduced an astounding thirty minutes. There are still many areas of the world that have good land which could be used far more productively if it was properly managed by large companies. For example, almost 90% of Mozambique’s land, an enormous area, is idle.
But to the wild animals in Africa and South America the land doesn't look undeveloped. It looks like where they get their food from.
Asian economic development translates into land development for farming in Africa. The more capital accumulates the more capital available to bring more land into production for human uses. Africa's problems have been an obstacle for Western and East Asian people to develop the place. But given high enough food prices the costs of dealing Africa's problems will become affordable for large farming businesses from outside of Africa. The money Bill Gates is spending to develop treatments for tropical diseases will bring treatments that let farmers work in areas which otherwise offer some protection to wildlife due to disease barriers.
Birth control offers a different way to solve the food problem which will save a lot of land from agricultural development.
I see a genetically engineered future down home on the farm. Opposition to genetic manipulation of crops is so passe.
In Japan and South Korea, some manufacturers for the first time have begun buying genetically engineered corn for use in soft drinks, snacks and other foods. Until now, to avoid consumer backlash, the companies have paid extra to buy conventionally grown corn. But with prices having tripled in two years, it has become too expensive to be so finicky.
“We cannot afford it,” said a corn buyer at Kato Kagaku, a Japanese maker of corn starch and corn syrup.
In the United States, wheat growers and marketers, once hesitant about adopting biotechnology because they feared losing export sales, are now warming to it as a way to bolster supplies. Genetically modified crops contain genes from other organisms to make the plants resistance to insects, herbicides or disease. Opponents continue to worry that such crops have not been studied enough and that they might pose risks to health and the environment.
It is worth noting that genetic engineering has been embraced much more rapidly for corn than for wheat. The reason: corn is mostly fed to animals whereas wheat is mostly fed to humans. Opposition to genetically engineered crops is stronger for those crops which humans eat directly.
This opposition to genetically engineered wheat has helped prevent wheat yields from growing as rapidly as corn yields (sorry, no cite. this is from memory). But necessity is the mother of invention. Rising hunger and budgets already made very tight by high oil prices are going to overwhelm much of the opposition to biotechnological means for raising crop yields. Even the Europeans are feeling the pressures to embrace genetic modification as a way to boost yields and lower costs.
Even in Europe, where opposition to what the Europeans call Frankenfoods has been fiercest, some prominent government officials and business executives are calling for faster approvals of imports of genetically modified crops. They are responding in part to complaints from livestock producers, who say they might suffer a critical shortage of feed if imports are not accelerated.
The rising East Asian countries such as China aren't going to worry about genetic engineering of crops. They are just going to do it. Europe is affluent enough to create a zone where crop genetic engineering is much less used. But the rest of the world is moving on. Governments want to ensure their own survival. Governments in less developed countries aren't going to fall as a result of rioting against genetically engineered crops. But the riots against high food prices could get out of hand and bring down governments.
In Cameroon, 24 people have been killed in food riots since February, while in Haiti, protesters chanting, "We're hungry" forced the prime minister to resign this month.
In the past month, there have been food riots in Egypt, Cote d'Ivoire, Senegal, Burkina Faso, Ethiopia, Indonesia, Bangladesh and Madagascar.
Unfortunately, opposition to genetically engineered wheat has reduced the amount of genetic research into methods of boosting wheat production. So we are going to see some lean years before the new incentives for genetic engineering finally start to translate into lower cost wheat.
"Everything has changed," said the 30-year-old Joseph, stabbing at a half-frozen chunk of poultry with a screwdriver. "My kids are like toothpicks. Before, if you had $1.25, you could buy vegetables, some rice, charcoal and a little cooking oil. Right now, a little can of rice alone costs 65 cents, and it's not good rice. Oil is 25 cents. Charcoal is 25 cents. With $1.25, you can't even make a plate of rice for one child."
“Food price inflation hits the poor hardest, as the share of food in their total expenditures is much higher than that of wealthier populations,” said Henri Josserand of the Global Information and Early Warning system of the UN Food and Agricultural Organization (FAO).
Citing FAO’s new Crop Prospects and Food Situation report, he noted that “food represents about 10 to 20 per cent of consumer spending in industrialized nations, but as much as 60 to 80 per cent in developing countries, many of which are net-food-importers.”
The report states that the rise of 56 per cent in 2007-2008 comes after the already harsh increase of 37 per cent in 2006-2007 that had been squeezing lowest-income households hard.
These people need genetically engineered foods. People who spend over half their incomes on food ought to be given free birth control too. Our interests are harmed (and habitats are destroyed and species driven to extinction) by billions more of very poor people.