Drought, You, and Yellow #2

2012 Iowa Yellow #2 corn, from Emily and my trip to Iowa earlier this month

It’s been a while since I’ve posted anything on Ag Policy here, but Tuesday night’s Colbert Report offered a golden opportunity to discuss a few of the key features of our industrial ag system. Unlike some past posts, I’ll try to stick to the (self-explanatory) facts rather than rail against the system itself. You can judge for yourself whether the system we’ve got is the one we want.

In the clip, Colbert plays a funnier Michael Pollan (no disrespect, Michael) while speaking to Bruce Babcock, professor of agricultural economics at Iowa State University. Watch the clip first, then read on!

Watch the video here (sorry, WordPress doesn’t let you embed flash into their blogs)

The interview begins with issues of scale. As Mr. Babcock states, “Iowa is corn country.” Here are the facts: this year, the blanket of corn covers 41% of Iowa’s exquisitely fertile land. Iowa planted almost 15 million acres of corn this year, or 15.5% of the 96 million acres of corn in the U.S. As a reference, America produces about 40% of the total corn harvest for the globe.

The interview continues to the issue of rainfall. Perhaps surprisingly, corn remains almost entirely un-irrigated in the U.S. Farmers depend on seasonal rains to produce a solid yield. This means that irrigation infrastructure doesn’t exist across most of the Midwest. (Personally, I think we should be grateful for this. The Oglala aquifer that underlies most of the land is expected to dry up in the next decade or so, even without irrigation of the nation’s most prevalent crop). When it doesn’t rain, there is little that can be done. And it’s not raining in Iowa, or in most of the Corn Belt.

Next, Colbert turns to the corn crop’s effect on food prices. According to Babcock, “You don’t need to worry about [the price of] soda pop or corn chips or corn on the cob.”

Why?

Well, the short answer is that soda pop and corn chips have a much smaller percentage of the corn price embedded in their sales price. This is a difficult point to make sense of. A useful analogy may be to compound interest. Products that use corn directly, such as soda pop and corn chips, use corn directly to produce the (diabetes-causing, heart-disease ensuing) goods. The cost of rising corn prices effects these good directly, but tend to get swamped by the cost of energy embedded in their production and shipping, and the cost of selling them embedded in marketing and labor.

And corn on the cob?  Corn on the cob is “sweet corn,” e..g. the corn you can eat directly without processing. It’s a very different incarnation of zea mays that makes up less than .3% of the America’s corn production.

The corn Professor Babcock was talking about? Fieldcorn, or Yellow #2 as it’s known on the street, a commodity defined only by its “0.2% or less heat damaged kernels, up to 5.0% damaged kernels and up to 3.0% corn or foreign materials.” If you walk into a field of Yellow #2, peel back the husk and dive right in, you’ll repeat the same earth-shattering experience I did as a child. The stuff is inedible, at least before it’s processed or fed to livestock.

In any case, as Prof. Babcock points out, “What you need to worry about is the eggs and chickens and dairy products…your beef and your pork.” Eggs? About 70% corn. Beef? 93% corn, according to Scientific American. That’s about half the corn, give or take.

Most of the other half, “About 35-40%,” goes to ethanol production. With a LOT less corn to go around for the next year or so, the feedyard operators and ethanol producers are in a bidding war over Yellow #2. In any normal market, the ethanol people would have packed up and gone home months ago, resigned to not make ethanol this year. It’s a highly inefficient process, after all, and people won’t pay $10/gallon for it.

Instead, more corn is going to ethanol this year than in any year in history thanks to the federal Renewable Fuel Standard. The RFS mandates that gasoline makers blend some 15 billion gallons of ethanol into their gas this year. Since the requirement isn’t based on price, ethanol producers can charge whatever they need to break even, which means they can pay whatever they need to buy the corn “feedstock.”

Farmers who can’t afford to feed their cattle will dump them on the market. If you have a deep freezer, this would be a really good time to buy two years’ worth of beef. Better yet, corner the market. The point is that prices will rise steeply once the glut is off the market.

Finally, lest you lose too much sleep fretting for our brethren in the Midwest, the interview turns to crop insurance.

Babcock: “90% of Iowa farmers have crop insurance. It’s a federal program…”

Stephen: “A federal insurance program? That’s just Obamacare for our corn.”

Babcock: “Well, in essence, you are right.”

He is right, in the sense that the vast majority of commodity crop farmers carry insurance, covering up to 85% of lost revenues, heavily subsidized by the government, and with none of the most basic environmental protections required by other farm subsidies. Ironically, heavily subsidized federal crop insurance is part of the reason we have 95 million acres of corn. Federal crop insurance has systematically taken the (private financial) risk out of industrial monocultures, removing any incentive to diversify what is grown in the field (the best form of “natural” insurance). Taxpayers are paying farmers to make riskier bets, and we pay again when those bets bust in the form of emergency aid packages.

Now is the time to bring a little sanity back into the picture. For one, the five-year federal farm bill is up for renewal; it’s our best chance to trim the subsidies and pseudo-subsidies (i.e. RPS standards) that have exacerbated this “disaster.” On the other hand, bad farm policy didn’t make the weather. Consider this closing exchange from the interview:

Colbert: “Is this the worst drought of our lifetime?”

Babcock: “Well, it depends on how old you are…”

Mr. Babcock’s answer gives a nod to the severe drought of the 1930’s that led to the Dust Bowl. Yet the obvious answer, for anyone who has been paying attention, is “This may be the worst drought you’ve ever seen, but it won’t be.” The right answer is that it depends on how young you are. If you are not super-old or terribly infirm or particularly danger-prone—if you’re planning to stick around for a few more years—you’ll see a worse drought than this in your lifetime. More likely, you’ll see a dozen.

 

 

Leave a Reply