Category Archives: macroeconomics

Too Much Corn and Too Much Deflation.

Today’s photo, above, is another from my helper, North Dakota photographer, Rick. This photo demonstrates the poor corn yield from a newly converted marginal land out of CRP into corn acres, in North Dakota, in response to high corn prices and a policy which pays for crop failure, and does not pay a competing price to keep acres in CRP. Rick’s accompanying comment for this photo was “New CRP cornfield: no weed control, no fertilizer, nothing.” (I can’t tell you how sad this story makes me, and you as a taxpayer should be outraged, dear reader.)

If you haven’t noticed, you haven’t been paying attention. All the buzz from our quasi expert economists lately is one word: DEFLATION.

In actuality, this condition has been smouldering for more than six years, or so, but QE-ternity and QE-Krugman have stolen the stage psychologically, even trying to scare us with inflation fears from time to time. Nothing combats deflationary forces like promoting fears of inflation, as there is a large psychological component to deflation, along with the inevitable deleveraging that must take place when an economy has over-leveraged itself. There are just no easy answers when an economy gets to that point, but the ride up sure was fun, wasn’t it? Perhaps your choice is to focus on the potential for collapse and doom, and there are plenty focusing on that, judging by the number of websites and zombie-apocalypse stories which have surfaced these past few years. We might be fine, at this moment, if we had smart, ethical leadership, i.e. a working government and a true democracy right now, but we don’t. Neither do we have a healthy press that can be a watch-dog to the process. Our newspapers continue their demise. And deflation isn’t going away because we also still have big banks that are too big; the goal is still to get everyone to sign their lives away to some type of note, whether it be auto, student, house, land, cell phone, or credit card so we can live beyond our means; and, then, in the end, no one’s saved for their retirement in a new era where we are, on average, expected to live to age 86. And speaking of life-expectancy, our health costs continue to spiral out of control even as we experiment with a new governmental health system that lacks that very thing, the reigning in of costs. What a mess we’ve gotten ourselves into.

Sorry, I’ve digressed badly.

Back to the purpose of this post. What does deflation mean to agriculture?

It’s pretty much agreed that the developing nations’ economic pictures are no longer so rosy, so previously anticipated demand from them may not come to fruition. Besides,they’re getting pretty good at large-scale ag commodity production themselves. We can no longer take for granted export markets in agriculture, and are relying more upon trade agreements. Some of those quasi expert economists which I referred to earlier are in Japan-speak right now, talking decades-out deflation. With an agricultural system that is built upon a mix of supply and demand forces, and policy-driven forces, each of those will be hurt during deflationary time periods. Demand will go down, both domestically and globally. Policy supports will probably back off as well.

Which brings us to the subject of corn.

We already knew we had too much of it and there are rumblings that there’s way more corn out there than the USDA is currently reporting. My family is telling me that there is the biggest daily-growing pile of corn in their small town in Eastern Nebraska, that they’ve ever seen. Corn is piling up everywhere. Farmers are holding on to it in hopes of better future prices even as the EPA has sanely reduced the previously set RFS limits to react to the blend-wall problem, driving its price down further.

Farmland prices are leveling off, as they should be, and there is no doubt that between QE and ethanol policy, the price of farmland is in a bubble.

As other areas of our economy are hit by deflation, agriculture will be, too. Today’s must-read is by Ed Clark, who wrote “Today’s Debt Level Surprisingly Close to 1979,” in which he states, “Featherstone is not predicting a repeat of the 1980s, yet he says the similarities between 1979 and 2012 are striking. ‘If there is a bust, it most likely would be caused by a drop in revenue than higher interest rates.'”

The corn farmer’s revenue is dropping. Per bushel corn prices are under their cost of production. Demand for corn is down.

And in the Midwest, the region which dictates agricultural policy for the whole U.S., it’s all about corn.

What Did the Average U.S. Household Spend for Food and Transportation in 2012?

The BLS has reported average U.S. expenditure rates (per consumer unit*) for 2012.

From the report, as compared to 2011:
• Average before-tax incomes went up 3.0 percent to $65,596
• Average annual expenditures went up 3.5 percent to $51,442
• Total food costs went up 2.2 percent to $6,599
• Transportation expenditures went up 8.5 percent to $8,998

In the pie graph below, I have taken the BLS data on food and transportation expenditures from the report and divided them by the average annual total expenditures (for the average consumer spending unit*) to come up with 12.8 percent spent for food, 17.5 percent spent for transportation, and 30.3 percent spent for the two categories combined.

The changes in per consumer unit* expenditures over two years reveal that the food category expenditure went up 5.4 percent in 2011, followed by 2.2 percent in 2012, whereas the transportation expenditures went up 8.0 percent in 2011, followed by 8.5 percent in 2012.

This year, the BLS also reported expenditure averages according to race. For example, Hispanics are spending 15.5 percent on food, and 19.7 percent of their total expenditures on transportation, according to the BLS.

It’s worth noting that the USDA also reports these statistics, and with a different set of numbers. The USDA reports that Americans spent 15.0 percent on food and 20.5 percent on transportation in 2012. Each year, the USDA’s expenditure numbers vary from this annual BLS expenditure report, and the reason why is unknown to me, but I’d venture to guess that they are using a lower income scale subset of data. The USDA also states that the food share of consumer expenditures is down from 17 percent in 1984, as consumers “spend a greater share of income on housing, health care, and entertainment.”

Another unanswered question for me, is how food benefit programs such a food stamps and free school breakfast and lunch programs enter into the consumer food expenditure data. I’d expect that these programs lower the BLS’s food expenditure percentage numbers from what they would otherwise be, since that portion of food cost is not an expenditure for the respective consumer spending unit, something important to consider when glancing at the data.

* A consumer unit, as defined by the BLS, averages 2.5 persons, 1.3 earners, with 1.9 vehicles, 64 percent of which are homeowners.


3 Picks: Gluten-Free Wheat, Plant Microbiology, Economic Optimism

Below, are today’s three chosen agricultural-related news picks.

1) Washington State University Researcher ‘very close’ on celiac-safe wheat, herbicide-tolerant barley: By Matthew Weaver. “Von Wettstein is working to develop nutritionally improved, celiac-safe wheat cultivars and breeding barley cultivars for the Pacific Northwest that would be resistant to the herbicide imidazolinone, commonly used by farmers. Von Wettstein said he has wheat lines where he’s obtained a 76.4 percent reduction in the accumulation of the key gluten proteins. The next step is silencing the remaining percentage.” [Sorry about the dead link, but Cap.Press website is under construction today. It should be available later.] UPDATE: Article still not available. I also found this, “Taking the Glower out of gluten.”

2) Report Proposes Microbiology’s Grand Challenge to Help Feed the World: “A greater focus on the role of microbiology in agriculture combined with new technologies can help mitigate potential food shortages associated with world population increases according to a new report from the American Academy of Microbiology. “Microbes are essential partners in all aspects of plant physiology, but human efforts to improve plant productivity have focused solely on the plant,” says Ian Sanders of University of Lausanne, chair of the colloquium that produced the report. ‘Optimizing the microbial communities that live in, on and around plants, can substantially reduce the need for chemical fertilizers, pesticides and herbicides.'” Improved understanding of plant-microbe interactions has the potential to increase crop productivity by 20% while reducing fertilizer and pesticide requirements by 20%, within 20 years, because all plants rely on microbial partners to secure nutrients, deter pathogens and resist environmental stress.

3) Calculated Risk is Bullish on the Economy: by Bill McBride. Some of you may know that McBride has almost never been wrong in his outlooks, so everyone pays attention when he provides one. He is more optimistic about the economy right now, than previously, he says. “It still appears economic growth will pickup over the next few years. With a combination of growth in the key housing sector, a significant amount of household deleveraging behind us, the end of the drag from state and local government layoffs (four years of austerity mostly over), some loosening of household credit, and the Fed staying accommodative (even if the Fed starts to taper, the Fed will remain accommodative).”

BONUS: This link provides state and regional farms that allow pick-your-own produce. Since it is harvest time, this is a great way to support these farms and find a healthy source of local food, too.

This news post was written and compiled by K. McDonald.

Notes from the Kansas City Fed Agricultural Symposium July 2013

This is one of the slides that Mike Boehlje of Purdue showed during the July KCFRB agricultural symposium. There was a global cropland expansion of 147 million acres in the past eight years. Most of these acres came from South America, the FSU, and East Asia, and most of those acres went into growing corn, followed by soybeans. Note that some of the added acres are from double cropping.


In mid-July, the Federal Reserve Bank of Kansas City hosted its annual agricultural symposium titled, “The Shifting Nexus of Global Agriculture.” I considered attending but did not, so instead I read the twitter feeds of those who tweeted the event and there are some good nuggets in the (modified) tweets which follow.

1) From speaker Mike Boehlje, Professor at the Dept. of Agricultural Economics, Purdue:

• Citing a new report he had just seen in the WSJ, Boehlje said that the IMF had decreased projections for world economic growth for the 4th quarter in a row. He said that this article has huge implications for agriculture including in China, India, and Brazil, too.

• Don’t drink the Kool-aid that the agribusiness sector is feeding. Growth in INCOME counts, not population growth. (K.M. Note: This was my favorite quote from this whole post, as I about go ballistic every time I see that “How are we going to feed… ” headline, which is far too often and gets the question wrong! …there are many other things that count besides growth in income, too, but it most certainly isn’t just about production.)

• Boehlje said he’s a pessimist on long-term U.S. livestock industry competitiveness, which was based on cheap feed. The U.S. demand for animal protein is “mature at best and probably declining.” Larger multinationals may well off-shore production.

He named 12 things to watch:
• EU debt crisis
• U.S. economic recovery
• changing value of the USD
• unpredictable Asian growth
• current short crop supplies – weather supply shocks
• livestock regulations
• increased global acreage for crops
• farm policy uncertainty
• interest rates
• fertilizer, seed, chemical, energy prices (input costs)
• farm income and land values
• counterparty risk

2) Univ. of Missouri’s Pat Westhoff:

• Don’t count on $7 corn “unless the world changes in very fundamental ways.” He sees sub-$5 corn the next 10 years.

3) Gavilon’s Ray Wyse:

• The FAO food index has tripled since the RFS was implemented, and land prices have increased five fold.

• There are still more acres to be had in the FSU region, and double cropping is growing steadily around the world.

• Some people are now looking at the People’s Republic of Congo as “the next Brazil.”

• Is it possible to double-crop corn in certain regions of the U.S. as Monsanto develops shorter season varieties?

• We will miss our corn export market when its gone.

4) Texas A&M economist Joe Outlaw:

• You don’t write a farmbill for the good years, you write it for the bad years. Policy makers have to focus on that reality.

5) Next, are a few tweets about farmland. Sorry, I don’t have all of the sources of the quotes.

• In fiscal 2012, Farmers National Company has sold more than 600 farms, for over $450 million. Active farmers continue to dominate the buy-side of the market.

• Investors purchased between 25-30% of FNC’s 2012 sales. Traditional investors about half, non-traditional investors growing.

• Jim Farrell: A new phenomenon we’re seeing is the 80+ year old cash buyer. He’s doing this since there’s no return on investment in CD’s or other “safe” investments. (K.M. Note: I’ve also seen this going on with home purchases where I live here in Boulder, Colorado. You’d think 75 year olds would downsize, but instead they upsize – presumably for a place to safely invest with a better chance of return on their investment.)

• Joseph Bond: Ag expansion in the Black Sea region will require billions of dollars of investment in modern agriculture techniques.

• William Mott: More concerned about infrastructure and logistics costs with international farming operations than cost of production.

6) Informa’s Kenneth Eriksen:

• There are “center pivots going up all over the map” in central and southern Illinois.


(Thanks to @Feedstuffs @ianberry and @HoardsDairyman for tweeting the event.)

The KCFRB’s links to talks and slides from the event may be found here:

Hot 5: Wyoming Supercomputer. Debt Burdens. New Nebraska Water Pipeline. Japan Substitutes Wheat for Corn. Sweet Potatoes.

1. The New Wyoming Supercomputer.

This video explains the newly opened NCAR-Wyoming Supercomputing Center (NWSC), which provides advanced computing services to scientists studying a broad range of disciplines, including weather, climate, oceanography, air pollution, space weather, computational science, energy production, and carbon sequestration. It also houses a landmark data storage and archival facility that will hold, among other scientific data, unique historical climate records. I’m proud to say that the video was produced by a friend who is the Lila Films producer.

2. Cleveland Fed-Speak on Debt Burdens

It is unfortunate that economics is an art and not just math, because today it has become quite the platform for politics and the public is confused as a result. Not so for households trying to balance a checkbook — that’s pretty straightforward.

Owen F. Humpage and Margaret Jacobson authored “The Burden of Public Debt” (10.30.2012) for the Federal Reserve Bank of Cleveland. Besides the different schools of economics, how-to-deal-with-our-debt is the subject that is primarily being politicized, so I thought this direct report was timely. When crunch time comes, the facts will no longer lend themselves to politics. (Please go to the source to see charts and the rest of the article if you are interested.)


This Cleveland publication begins by pointing out that the IMF has issued warnings about the average ratio of public debt to GDP in the advanced economies that could damage future growth prospects. The U.S. public-debt burden will settle at 114 percent after 2015, according to the IMF. Debt burdens above 100, 85, or even as low as 40 percent are considered high ratios by the IMF. These same nations face aging populations which add to the burden.

To the extent that public debts absorb private savings that otherwise would support private investment, long-term economic growth will suffer.

Because advanced economies around the globe face large debt burdens, they will be competing for domestic and foreign savings to finance their public debts which will lead to substantially higher interest rates.

Smaller financial inflows at high interest rates spell less domestic investment. Likewise, they are likely to initiate bigger exchange-rate movements.

Central banks will have difficulty reducing their balance sheets since high interest rates increase the cost of funding public debt. The IMF calls the scenario “sobering”.

The anticipated high public-debt burdens could also complicate central-bank efforts to reduce their balance sheets. High interest rates raise the costs of funding public debt. Their impact on government debt burdens can become profound if crowding out simultaneously slows economic growth. Under such circumstances, governments, intent on financing their debts at low costs, might exert pressures on central banks to keep monetary policy relatively easy. Inflation would then rise. The beneficial budget impacts, however, would only be transient because savvy financial markets would quickly demand interest rates to compensate for higher anticipated inflation. Nominal interest rates would eventually rise, leaving the real interest cost of financing the debt unchanged.

The IMF, like many economists, views the advanced world’s fiscal prospects as “sobering.” To be sure, countries—including the United States—have reduced heavy debt burdens successfully in the past. They did so by shifting the noninterest portions of their budgets to surpluses while maintaining relatively strong economic growth. Repeating such efforts while coming off of the worse economic collapse since the 1930s and facing adverse demographic trends does seem sobering—to say the least.

3. A Historic Nebraska Water Project to Address Legal Compliances

Medicine Creek in Nebraska
Photo credit: Flickr CC via skw9413

The Natural Resource Districts in central and southwest Nebraska have purchased a 19,518-acre farm in south-central Nebraska in order to idle 115 center-pivot irrigation systems. This will help to end decades-long water legal disputes for Nebraska including the Republican River Compact.

It will idle farmland that would otherwise be used to grow corn, soybeans, and potatoes.

The cost of the land purchase was $83 million. The seller was a group of out-of-state investors under the name “Lincoln Farm” and the farm was previously owned by a New Mexico and Texas cattleman. Nebraska irrigators will pay for the purchase.

The land will be reseeded as rangeland.

To accomplish the water obligations, a 17-mile pipeline will be needed to transport water to a Republican River tributary such as the Medicine Creek and to the South Platte River. After the engineering of the design is completed, it is expected that 45,000 acre feet of water will be added to the rivers in years when needed to meet compliances.

4. Japan is Substituting Wheat for Corn

Japan, the nation which has historically imported the most corn from the U.S., started switching to wheat use as feed in the fall of 2011. When corn prices went up sharply this summer due to the combination of drought and ethanol policy in the U.S., the substitution became more pronounced as demonstrated in the above graph provided by the U.S. Grains Council.

The USGC states:

High global corn prices will cause reaction in the industry with people trying to mitigate high feed costs. This substitution is a great example of increasingly competitive situation facing U.S. corn. Once end-users and feed mixers become accustomed to a new ration, it can become a challenge to win back the market.

5. Sweet Potatoes.

Photo credit: Flickr CC via NatalieMaynor

Fifty percent of the sweet potatoes in the U.S. are produced in North Carolina. The states of California, Louisiana, and Mississippi harvest most of the remaining fifty percent.

One cup of cooked sweet potatoes contain 377 percent of our daily requirement of vitamin A.

Many people are confused about the difference between yams and sweet potatoes. Nigeria leads the world in yam production, and yams are seldom found in the U.S. They contain only a meager amount of vitamin A, and are drier and starchier than sweet potatoes.

From 1998 to 2008, the U.S. consumption of white potatoes declined by 14 percent whereas the consumption of sweet potatoes increased by 32 percent. Sweet potato fries have become very popular as a tastier, healthier option to traditional fries.

There may be a great opportunity for continued growth in the sweet potato market share, which is still less than 5 percent of the potatoes consumed in the U.S.