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(AV17498) The Landscape of Agriculture Today and Tomorrow


good evening and welcome to our lecture
tonight I’m windy winter Steen I serve as the Dean of the College of
Agriculture and life sciences it’s my pleasure tonight to tell you a little
bit about dr. Mike bulgy he is a distinguished professor in the
Department of Agricultural Economics and the Center for Food and Agricultural
business at Purdue University he has devoted his career to helping farm and
AG business managers and policy makers understand the pragmatic economic and
financial consequences of their decisions a major theme of his work is
the importance of strategic planning thinking and positioning for long-term
viability and success dr. bull G is an ISU alum he received his BS in Ag
economics in 1965 he previously served on Iowa State University economics
faculty and as an assistant director of the Iowa agriculture Experiment Station
and assistant dean for the College of Agriculture he has also held faculty
positions administrative positions at the University of Minnesota and Oklahoma
State University he is author or co-author of four books and more than
450 articles and publications he is a fellow of the agriculture agricultural
and Applied Economics Association and the International Food and Agriculture well thank you very much it it is a
humbling opportunity for me to be here on the Iowa State campus and and have
this chance to visit with you about some of the challenges and opportunities we
see in the agricultural industry but before I do that I do want to at least
share with you a little bit about how Iowa State University shaped my career
and I was telling Wendy that I just decided to kind of sit down and make a
list of the people that I had the chance to learn from to work with to
collaborate with here at Iowa State and when I got to 30 and was still going I
decided can’t go there can’t name 30 names okay that’ll be the whole evening
so what I’d like to do is just name a couple of people that really were very
imp active in terms of my career that are people that you may or may not
recognize and one of them is the late dr. Raymond Beneke Raymond Beneke was my
advisor as an undergraduate okay he and others in the Department of
Economics were basically telling me that maybe I should consider graduate school
and I hadn’t really thought about graduate school at all and Ray was a
Minnesota graduate and so he talked to his people and friends in Minnesota he
was disappointed that I chose not to go to Minnesota that I instead chose to go
to Purdue but he and JT Scott were really really very impactive on me when
I was an undergraduate I had the chance to come back here on the faculty and
Beneke was the one that convinced me to come back actually because he was the
department head yet at that time to come back and join the faculty here had the
chance when I was here to work with with a number of people that I’ll always
remember working with people you’ll recognize enjoyed the chance to work
with Neal Harrell we did a lot of work together actually we’ll talk a little
bit about it in the in a presentation about this time of year back in the
1980s we had a team that was working the financial
stress of the 80s in Neil Horrell and Bob jolly who were two of the people
that did a lot of work with at that time very much enjoyed had a chance to work
in the Center for agriculture and rural development was actually the director of
that for a while after all had his accident
and Dan really did enjoy the opportunity that then Dean leaked Homer provided for
me to to spend some time at administration in there Louie Thompson
the late John most ed Lee calmer again very impact Eve in terms of my career I
left Iowa State to be an administrator at at Minnesota and after doing that for
another five years decided that really the best position to have in a
university is a senior professor and so I went to Purdue as a senior professor
and have been there since 1992 but Iowa State did shape a lot of what I do today
in terms of of thinking about how to work with producer groups out of work
with agribusiness companies how to work with people helping them think about as
was indicated strategic positioning in how to position for both the good times
as well as the more challenging times and that’s what we really need to talk
about this evening yes how do we think about positioning ourselves giving that
we have these challenging times that we have in this industry so what I want to
do is I want to kind of do two things number one so I want to talk about what
is shaping the landscape of the agricultural industry both today but as
we think about it over the next 10 15 20 years you can’t talk about this without
talking about where we are today okay well we don’t want to focus our
intention or our attention completely on the tough times that the overall economy
and that’s parts of agriculture in today we want to talk about the opportunity
side of this and let me remind you that in any turbulent time there is along
with the risk associated with that there is opportunity and there will be real
opera attorneys out of this turbulent time as
well so we’re gonna talk about these forces that are shaping the agricultural
industry how they’re shaping the agricultural industry in my judgement
and then we’re going to talk about what they mean in terms of challenges
opportunities particularly focused on the production sector now III would tell
you that when I was called when Wendy called me to do this I said do you want
a research seminar on and presentation or do you want a more of an extension
outreach engagement presentation and she said well I think really given the
audience it would be probably more appropriate to kind of think about this
in terms of an extension outreach engagement presentation so that’s what
you’re going to hear but let me just tell you that I am going to draw some
conclusions that those of you who are researchers really ought to say hmm I
think that’s closer to our hypothesis right I’m not sure that’s necessarily
correct and I think there’s probably I don’t know 17 20 research projects in
this next hour’s presentation that you could really think about okay so if you
are research oriented there’s a whole lot of stuff here that we don’t have
answers to you’re gonna hear me say some things as though I think I know the
answer but I would have to argue that in almost all cases we need more analysis
than sometimes we have in these areas so here’s the seven things that we’re going
to talk about in terms of the fundamental drivers and then I’m going
to talk about the challenges let’s get into these drivers you cannot talk about
what’s going on today in agriculture without talking about what’s going on in
the overall economy okay this economy is under severe financial
stress we all know that emanating out of a lot of different causes and we aren’t
going to go into the different causes of that you can read about that into
various other venues we won’t spend time on that what I want to talk about
specifically is what’s what this all means for agriculture okay and not only
for production agriculture for an agribusiness issue firms as well there
are two fundamental implications of this financial stress in the overall economy
that we need to think about an aggregate one is the one that we hear a lot of
discussion about and that is this issue of capital availability and the classic
what we sometimes refer to is the freezing of the capital markets okay now
as you can see from the bullets we have here and we don’t have time to go
through all of them that our perspective is that agriculture and particularly
production agriculture is not nearly as severely impacted by this freezing of
the capital markets compared to a lot of other industries there are a number of
industries to be very frank where lenders just don’t have the funds let
alone the appetite to make a loan to that particular firm in that particular
industry okay this has generally not been a problem for agriculture in large
part because agriculture sources its funds from different institutions then
we get for the commercial larger commercial businesses community
banks for example have a fair amount of liquidity they may have concerns about
credit worthiness of a customer we’ll come to that in a second but in terms of
funds availability they haven’t had the funds restrictions that we see in a lot
of the national and international banks the Farm Credit System which is another
major lender into the agricultural sector again has better access to the
national and international capital markets than some other institutions
although Farm Credit System has encountered difficulties in terms of of
basically issuing ten-year and longer-term debt it’s had to pay higher
interest rates on those debts and therefore it has higher cost of funds
associated with that and so it has been a somewhat of a challenge for them to
position themselves competitively in the markets okay on longer term funds there
are some other lenders international lenders and if you’re interested in
trying to borrow money on farmland I’ll tell you who they are privately who are
very very competitive in this market today
interest rates of five and a half percent okay we work a lot with a
lending community and I can tell you there is five and a half percent real
estate money out there today okay insurance companies and some
commercial banks international commercial banks their Farm Credit
System has generally been at rates of seven and
seven and a half until recently when they found that they had to lower their
rates to be competitive with what’s going on in some of the other
institutions generally however that issue in agriculture with respect to the
financial stress is not one of funds availability it is this issue we have a
significant economic slowdown globally okay
it’s not just a recession in the US and a recession in Europe actually IMF has
come out International Monetary Fund has come out with a new set of projections
that indicate that almost every country with the exceptions of China will
probably have either close to zero or negative economic growth in 2009 so this
is a recession of the order of magnitude that we have not seen for quite a while
but let me make sure you understand we have been there before we are still
not as bad as we are in terms of the overall economy in the 1980s notice I
didn’t say the depression not even close to the depression just to
put it in context in a depression we had a decline in the gross domestic product
of this country by 25 percent we had 25 percent unemployment that’s what a
depression is okay we think that we’re going to probably end up in something
like 8 to 9 uuhhh the Fed came out with its
forecasts yesterday they raised their their unemployment numbers they lowered
their growth rate for the US they still think we’ll be able to get through to an
economic recovery before we hit 10% unemployment but that is not even as
difficult as it was in the 1980s in terms of the overall economy ok so we
need to be careful to not put this in the context of we’re going back to a
depression area is it difficult absolutely those that are unemployed is
it hard for them absolutely but the overall economy is not as bad as it was
during the 30s and it still isn’t cause it is was in the 1980s now the key
issue and one of the things we’re going to be kind to give you at least our
judgment on is when will this recovery occur and so that you can put it in a
context and you can change my prediction because this is what I’m looking at and
so you can say bulgy was wrong and that’s not an atypical most economists
don’t quite get it right we’re not particularly good at predicting right
but what you want to do is you want to look at the drivers okay
the fundamental driver that we need to be watching to help us understand how
deep and how long this global recession will be is what happens in China China
now is growing at somewhere around six point eight six point nine a little
short of 7% per year in terms of its GDP that’s down from 13% last year part of
the high growth rate last year was was gearing up for the Olympics it appears
but China has been growing at ten to twelve percent per year for the last 20
years okay this is an economy that has been growing at three to four times the
growth rate certainly over a smaller office smaller base than we have had in
Europe in the US but a much higher growth rate than we’ve had in in in in
India by the way has been growing as well at about 6% we’ll come back and
talk to the population and the importance of these countries in terms
of that growth rate and what it means in terms of food demand the key issue is
does China maintain its growth rate at something above four three four five
percent we’re not worried about a recession in China the reason we’re not
is because the Chinese have adequate financial reserves without borrowing a
dime to be able to carry their economy with government expenditures probably
for about 18 to 24 months okay so they have funny plenty of financial capacity
to weather an 18 to 24 month recession but the issue is if this continues to go
on longer and deeper China itself will possibly run out of money as well so the
question is what happens in China if we have a
slow down in China getting into the 3 to 4 percent area then this recession will
probably extend on through into 2011 or certainly into 2010 maybe not 2011 but
2010 everybody’s hoping we’ll get recovery by the end of this year I’m not
that optimistic we will even if we do it’s going to be a slow recovery it’s
not going to be a pop and so the the the issue is what happens in China that’s
important for agriculture because we have to find a replacement for the
demand that will be maturing out from the energy market for the agricultural
industry we’ll talk about that in a second that demand historically has been
prior to ethanol the animal protein demand in the rest of the world and a
big part of the rest of the world has been China India and Asia in general
terms of growing demand and so the question is if China slows down
sufficiently that they don’t have enough income growth to continue to increase
their animal protein consumption what does that do then to the demand for
agricultural products and any demand for animal animal products obviously has an
impact back in terms of the grain markets as well we say here costs adjust
slowly but that’s maybe not quite as true as it used to be we’ll talk about
that in a second so fundamentally the question in agriculture is one of a
concern about margin compression due to the fact that we see economic growth
slowing down therefore demand growth slowing down and our costs are not
adjusting as rapidly as they might I have I have here it’s kind of the
financial condition of the various industries I don’t think we want to
spend time on that at this point if you want copies of my PowerPoint slides
you’re welcome I’ll be happy if you email me to to provide the America and
make them available to you to provide if you want to put them on a website
someplace so the question that many people ask then is ok are you predicting
or suggesting we’re going back to the 1980s ok
and and and III don’t have time to develop that it’s in full detail but you
can see again our perspective in terms of some key observations our answer to
that question is no we aren’t going to have a 1980s phenomenon in agriculture
where you saw a 50% decline in land values here in the state of Iowa for
lots of reasons one is we are going into this period of time with low rates of
inflation and low interest so that is not a major driver of the the
precipitous decline in lacet values as well as declining incomes that we said
in the 1990 we’ve actually come into this period it was three years of record
incomes in agriculture so we’ve established at least some kind of
liquidity at least for grain farmers depending on what they did with those
funds unless they decided to buy a lot of new machinery there’s a lot of funds
available for the typical operation better liquidity little inflation
investing behavior in the 1980s there was a lot of activity that looked very
much like the activity in the housing market of the last two years buying
assets that were going up in value even if you couldn’t make the cash flow and
then when you couldn’t make the payment you’d refinance the land monetize the
capital gain and hit it again and just so you think about this if you think
that those people out there in the housing market were irrational in this
behavior be careful because it might have been your father in the 1980s as a
farmer right you’ll have to be really careful because we have done that in
agriculture right now our debt load in agriculture we learned our lesson our
debt load in agriculture we have only about a 10% less than 10% debt to asset
ratio in this industry as an interesting contrast by the way bear stearns the
investment bank when it was bailed out had a debt to asset ratio of 33 to 1 ok
33 to 1 that’s quite a leveraged position that’s
part of the reason why that industry imploded in a matter of about three
weeks is because it was highly leveraged and hot money finance money borrowed
overnight to do that ok so our expectation is we won’t have
the 1980s phenomenon but let’s be cautious I didn’t say we might not have
some adjustments in asset values let me give you some numbers my expectation is
that we will see probably in the next 12 months somewhere around a 10 percent
decline in asset values I’d put an 80 plus percent probability on that
prediction and there’s evidence of that showing up already the Kansas City
Federal Reserve Bank just to release their survey of the quarterly change in
land values for for Nebraska and the other states they represent Missouri it
was down as I recall 1 to 2 percent the work we’ve done with the banking
industry indicates that Northern Iowa Northern Illinois probably have
somewhere around a 5 to 10% decline already in land values what what what is
the best evidence of where this markets going is what happens in all these
markets is what happens the early phases of adjustment is activity goes to
nothing no transactions a lot of no sales farmers national one of the
largest farm management companies in the in the in the mid Midwest just released
in December information indicating that they had had a lot of no sale activity
in particularly in the Western Corn Belt okay I would not be surprised to see
even as much as a 20% decline in land values over the next 24 months ok I’m
putting somewhere around a 40 percent probability on that okay now let me also
just warn you though that as a friend of mine told me recently when we did a
program together he said well what bulls he just predicted to you if a 10%
decline in land values is no change the land market is so thin that if you
really did the analysis you would find that a statistic that a change of five
to ten percent up or down is really not statistically significantly different
than zero okay it’s just so thin that we really don’t know what’s happening if we
don’t have changes either above or below those numbers but I suspect that there’s
going to be very hard to see any kind of uptick in land values in this particular
business climate but not anything close to what we saw in the 1980s okay I’ve
got here a list of things that we learned from the 1980s because that’s
always the question and we get a lot of a lot of people asking right now and so
you can see some of the stuff that we learned in the 1980s how we can position
ourselves maybe to be successful in this environment importance of liquidity
maintaining strong financial position watch for opportunities will return to
that there will be distressed assets that can be acquired will have land
rental renamed range moments that are severed because of of landlords and
tenants not having the same expectations of what the future looks like so there
would be opportunities to rent land that you never had the opportunity to rent
for the last 15 to 20 years we noticed there hug your lender now’s not the time
to be trying to find a new lender that will give you another 50 basis points or
a half percent reduction in rate it’s just not worth it okay your lender that
you’ve worked with through this period of time in the past is one you want to
stick with right now a position for the turnaround and generally what we found
if you look at those that made it through the 80s and we’re successful and
came out of the 80s and not only a strong position but use the 80s
phenomenon as a growth strategy and there are some been very successful at
that generally they were people who were too late if you will to the market
rather than too early probably the classic example of somebody generally in
the financial markets that maybe is a little bit early
is Warren Buffett’s acquisition of Goldman Sachs in November
although Warren Buffett you all know Jimmy Buffett’s uncle right okay Warren
Buffett they are related actually that’s probably one of the few heirs he’s made
in his investing okay be err better to be late than to be early in these kinds
of business climates in terms of making your moves okay let’s talk about energy
a second now in state of Iowa to talk about energy and ethanol I probably
ought to be cautious here but I’ll just you know jump right into it
ah this is maybe the best way kind of think about this right okay my mother
used to tell me clean up your plate they’re starving people in China right
there are cars all over the world starving for ethanol so finish your corn
okay okay this kind of tells the story of ethanol recently a year ago we were
making a buck a bushel profit on every bushel of corn we were putting through
an ethanol plant six months ago we were losing a buck a bushel little volatility
there and more recently generally as you can see the margin per bushel in the
ethanol industry is negative for most ethanol operations okay it’s not a
particularly profitable industry right now about 15 percent of the capacity is
now off stream we have a number of plants that are in financial distress
verasun bankrupt the largest one of the largest in Wisconsin renewable energy
declare bankruptcy two weeks ago we’ve gotten one in Kansas there’s if you look
at the look at the number of firms that are on the edge it’s a pretty pretty
tough business to be in now that kind of story would would would give you ups
that kind of story would give you pause about the future of the ethanol industry
itself okay and our expectation is that the ethanol industry is in a maturing
phase if you want a number the work that well the Tyner a colleague of mine at
purr dude as doing he’s probably the best energy economist renewable energy
economists in the country he is arguing that this industry will Wilma tore out
in terms of corn-based ethanol add about 15 billion gallons we are now hitting
the blend wall the work we’ve done a Purdue indicates that we were going to
hit the blend wall at least by 12 billion gallons of ethanol and you see
that showing up what that means is that we don’t need any more ethanol to blend
if we’re going to stay with a 10% blend right so we either have to go to e85 or
we have to get the blend percentage up above 10% and now there is major
discussion the CEO of poet just has been around the
countryside talking a lot about how to increase the ethanol blend to a 12 and
to 15% there is a challenge here and the challenge here is not only is it a
change in public policy to do that the auto industry now doesn’t warranty cars
above a 10% blend now I think the auto industry’s probably got a few other
problems to worry about before they think about we’re solving that problem
right so you’ve got to convince the private sector to make some changes to
get that to eliminate that blend Wold as well the other problem with a blend well
to be honest is we have the blending capacity for ethanol is on the east and
west coast it has not been beefed up particularly we haven’t made the
investments on the west coast apartment on the East Coast particularly and so we
just don’t have the capacity to blend much more than 12 billion gallons in
terms of physical capacity to do that blending that splash billet blending so
that’s part of the reason not only the decline in oil prices to less than $35
today but also because ethanol now is is being priced at about a buck fifty five
buck 60 that’s part of the reason why this ethanol industry is in the kind of
condition it is but the longer term opportunity here of the Bioeconomy is
really really I think quite strong and you can see it of components of the
Bioeconomy that we think have potential if you think longer term next generation
biofuels certainly are there and again this isn’t going to be popular to say
but say Asik is still a ways away from early and even when it comes the
Brazilians will celebrate and blow us out of the water
okay Mahaffey even work harder to keep Brazilian ethanol out when we get
cellulosic we work with a company that’s got three 100 million gallon plants
under construction in Brazil recognize that sugarcane ethanol is now
20% cheaper in the US could be 20% cheaper if we didn’t have to pay a
tariff on it and have an import quota you can put Brazilian ethanol into the
u.s. sugar asshole in the in the u.s. 80% of corn based ethanol cost wise if
you didn’t have to pay a 50 percent tariff per gallon and you got an import
quota okay sugarcane generates 10 times the tonnage
per hectare per acre as corn does okay so if you’re thinking about cellulose
‘ok product now you’ve got 10 times the tonnage you’ve got something that’s
really really pretty profound to work with not only that but they are ready
after they burn the leaves off they already cut the cane and take it to the
plant the biggest challenge was cellulose ich to be quite frank is not
the enzyme it’s gathering that low bulk density stuff and storing that low bulk
density stuff particularly if it’s corn based because most ethanol plants would
like to run for an entire year and corn is only available during part of the
year so you have to store for the whole season
with sugar you already incur the cost of taking it to the plant they squeeze the
sugar out to get either a sugar product and/or an ethanol product so they can go
either way depending upon markets they have the bagasse they burn the bagasse
to fire the plan or to provide energy to plant all of those plants down there are
now being built so that when say elastic comes along they will build a second
cellulosic plant right next door they will take the bagasse out of that first
plant move it over to the second plant get a second stream ethanol the only
cost they’ll incur to get that is for the natural gas or the electricity to
run that first plant and so if they can do that that’s going to put their cost
to somewhere closer to 70 or maybe even 60% of the cost of corn based ethanol so
it’s going to be a really really tough sledding I would argue not for
cellulosic ethanol I’m not arguing against cellulosic ethanol I’m arguing a
issues associated with the feedstock of cellulosic ethanol by the way we could
do that in the u.s. too we have a sugar industry in the southern US and sugar
industry in the southern US is now starting to think about exactly this
issue of positioning itself to take the technology out of Brazil and bring that
into the US and have sugar based ethanol here in this country my my optimism
about the future is the latter two on this the bio chemicals and the
biomaterials that I think eventually will come from agricultural raw
materials okay front from the carbon based products
that we produce in agriculture as a substitute for the carbon based
petroleum phenomena that most synthetic chemicals and fibers are manufactured
out of okay now is that something we’re gonna have in five years no my
expectation it’s in the 10 to 15 to 20 year time horizon and so one of the
issues I’ll come back to here in a second again is somehow we have to
bridge from the slowdown in the growth that bio that enter that ethanol is
providing us we got to have something pick up the demand to bridge the growth
for agricultural products until we get to some of these more exciting other
uses for agricultural raw materials and that bridge has to be at least it would
appear to me to be animal proteins and exports of animal proteins we’ll talk
about that in a second biopharma is also a possibility we already have pig
populations we’re using to generate transplant organ transplants there is
lab work being done on how you manipulate both corn and tobacco by the
way it’s interesting tobacco is one of the products that they’re genetically
manipulating that would be interesting to change tobacco from a bad to a good
Wow manipulated so that in fact can be be
part of what we eat to reduce the incidence of cancer reduce incidence of
Parkinson’s of alzheimer’s ms and other neurological diseases 18% of the
consumers budget is spent on health care what happens to
agriculture if now we create products that will solve that 18% of the
consumers but only 10% in the u.s. of consumers budgets are spent on food less
than 10% okay I mean when you look at the opportunity we have to mainstream
agriculture by taking the raw materials of this industry and providing a broader
set of materials for broader sets of industries okay besides just the
nutrition industry you can get pretty excited about the long-term future of
this industry okay and I think there are reasons to be very optimistic is it
going to happen tomorrow no are we gonna have a bump in the road before it
happens yes but this gets one it gets me at least pretty excited about the future
of this industry now let’s talk about globalization real quickly I think the
subtitle here is probably appropriate for those of you young enough to not
realize or no realize or remember what happened in the 1970s in the middle of
the Cold War when Nikita Khrushchev had to crawl on his belly to come to the
u.s. to buy food to feed his people we were their arch enemy this just had to
be one of the most demeaning things he had to do some people have said that
started to be the undermining of that command-and-control system when you
couldn’t even feed yourself you had to go to your enemy with their capitalistic
market system to get the food why did they come to the US why didn’t go to
Australia why didn’t go someplace else we were the only store in town we were
the only ones that had that much food to be able to provide them but it’s changed
it’s changed dramatically now we’re just a loaf of bread in the basket
now there’s two parts to this globalization one is the increased
demand globally particularly for animal proteins okay it’s probably the best way
to visualize it that’s a swimming pool in China
you don’t swim many laps in that pool right 1.3 billion in China compared to
300 million in the u.s. roughly in India we have new numbers this year compared
to last year last year they said they had a population of 800 million this
year they said all we found a few more people
a billion ok 2.3 billion people just in those two countries ok but it’s not just
that people from an economists perspective it’s people with money that
make the difference that’s what we call effective demand and here’s that concept
as people make more money which is what we’re reflecting on this axis here they
increase the percentage of their diet that’s animal protein based ok and we
see if you look at this chart you can see that we see down in here most of
Asia this classic hockey stick where they’re
profound I mean in essence what happens is people make more money after they buy
their TV set and their cell phone they better used to say I used to be more
careful with that I shouldn’t say that they different right
there’s any vegetarians in the room now I’m surprised I didn’t get somebody to
stand up and jump on me because some people don’t believe eating animal
proteins is better right they differently eat more animal produce India has been growing at 6 to 8% per
year in ants per capita income for the last 10-15 years China has been growing
at 20% per year for the last they’ve been moving for last 20 years and then
moving 10% for last 20 they both moving very rapidly along that axis but this
economic recession has slowed that down profoundly and that is the biggest
concern we have over the next 24 months for agriculture is that if that occurs
and ethanol matures out which is maturing out
of the demand for agricultural products and this economic growth slows down
enough that we don’t get this increased utilization of agricultural raw
materials and animal production because of increased animal demand we could be
in for a period of classic short peak long trough problems in agriculture okay
and by the way that’s the history these Peaks don’t typically stay very long
they stay about three years if it’s a demand driven peak three to four which
is what we had this time if it’s a supply peak it’s about one to two years
okay and then we go back to the only question is do you go down in the trough
to where you were before or do you stabilize it something a little bit
higher than that this is the biggest concern we have is that we may not get
this growing animal protein demand by the way just so you know this phenomena
is sustainable if we get the income growth this has been occurring for 50 to
60 years it’s not just a recent phenomenon okay it is in fact
sustainable in terms of the source of the source of growth so the long run
again if we can get our economies going back and growing is quite positive for
agriculture not only because of the broadening of the uses of agricultural
products in other industries but also because of this increased demand for
just a nutrition market not the US domestic demand but the export demand
but there is a challenge and that’s the challenge that is soybean production in
Brazil now you probably can’t see it but that’s 32 combines going across the
field in fleet formation with 18 no-till planters behind it that’s the way they
do it in Brazil I don’t know how many of you have looked at the El to hear a weds
website an Argentine based company they have a website you can look them up
there as far as I know they’re the largest production company in the world
there is one in the Ukraine that maybe is close to it Elsa Hera farms in four
countries they are in Argentina Brazil Bolivia and Paraguay okay
750,000 acres their goal is a million and it was for pretty traditional
Argentine five pretty traditional Argentine families in central Argentina
with twenty thousand acres twenty years ago
that decided that there had to be a better way to farm than what they were
doing it okay they own no farm land they own no machinery they are classic deal
makers they are deal makers that’s what they do they make deals in terms of
buying and selling okay and they have been able to be quite successful growing
their business so so we have to think about how to compete with this right but
actually when I say Brazil that’s what most farmers think about is soybeans
right that’s really not the problem okay our number one agricultural export
in the US longer term for the last twenty years has been animal proteins
and it’s been specifically poultry okay Brazil exports more poultry than we do
and it’s growing faster alrighty there in the animal protein what did we say
earlier it’s where the demands going to be animal proteins Brazil is already
playing the game very very effectively okay we need to understand that and I
talk about Brazil because I think it’s a classic situation not unlike maybe where
we were back earlier this century the economic development strategy for Brazil
is what agriculture the president of the country worries about agriculture in
contrast to the president of this country I’m not trying to be political
I’m just saying that it is the focal point of that country
if they continue if they continue to grow their public sector R&D activity at
the rate it has grown for the last ten years improper in five years they will
be the largest public sector Rd organization in the world and that
includes the US Department of Agriculture here in the United States
that is a sobering statistic that is a sobering statistic for us can we compete
with Brazil absolutely but we cannot be complacent we cannot be complacent that
just because this market is going to grow they’re going to come to us like
Khrushchev did in the 70s there are plenty of other competitors out there no
we haven’t even talked about what’s going on right now in terms of the Black
Sea region in terms of the increased wheat production in the Ukraine Ukraine
and other parts of that and don’t ever forget by the way even though I don’t
produce any weed on my farm in Northern Iowa most of you don’t produce wheat the
crop i watch is wheat because wheat caps corn wheat is not a food grain it is a
feed grain in most of the world okay most of the world doesn’t feed corn they
feed wheat and wheat has about 110 percent in the nutritional value of a
bushel of corn so if you’ve got five dollar wheat you can’t have over 450
corn if you’ve got $4 wheat you can’t have
over 360 : and we have had profound dramatic increases in wheat production
in the Black Sea area the Baltic States etc and that’s part of the reason not
that and oil prices are why we’ve seen some of the significant declines we’ve
seen in corn and soybean prices so we have this issue of competition in these
markets and and we don’t have time to go over it in detail I would just mention a
couple of other quick things when we look at this slide that we need to
recognize I tell you tell farmers there are three things you want to watch to
kind of predict corn prices okay three things number one is you watch the
price of oil okay for the last for the last 36 months there’s been a 90%
correlation between the price of oil and the price of corn you could get up in
the morning look at the paper find out what happened the price of all you knew
what was gonna happen the price of corn 90% correlation now that’s being severed
right now that’s being disconnected but it’s been a very tight correlation so
you look at the price of oil second thing you look at is the value the
dollar oK we’ve had a declining value of the dollar by 45 percent from 2002 to
2008 and that’s why in spite of everybody saying that this ethanol
demand of about a third of the corn crop was going to come out of exports it
didn’t exports stayed flat it came out of the livestock industry and the reason
is because corn was cheap and the rest of the world so ever soybeans okay
because of the declining value the dollar
now that dollar has gone up by about 40 now about 20 percent in the last two or
three months why are we conflicted in agriculture what do we want well if we
want strong exports we want a weak dollar but on the other hand we
certainly don’t want the financial stress and not being relaxed s to
capital markets that we have had in the last at least some people have had and a
markets generally have had in the last two months the markets have have
reflected a higher valued dollar in part because of the flight to say oh the
flight to quality flight in flying back to the US dollar our economy is in
trouble but it’s not in as much trouble as most of the other economies okay so
the value of the dollar and exchange rates are extremely important okay
the other thing too by the way I should tell you I look at three things and I’ve
already told you what they are I look at the price of oil I look at what’s
happening about you a dollar and look at the price of wheat okay now I can figure
out what’s going to happen to corn prices or soybean prices corn and
soybeans are tied together but the other side of this we need to understand is
what we’ve done to restructure the input markets close to 60% of our nitrogen
today is imported close to 60% of our nitrogen is imported and that supply
line is somewhere between 30 and 60 to 70 days long okay
which means that that stuff even if I wanted it it’s going to take if it has
to be purchased it’s going to take some two to three months before it shows up
on my farm even if I buy it and pay cash for it talk about those people who
bought and paid cash for that one of the reasons why that is the case is we’ve
had a low value to the dollar okay about about a third of the rise know maybe
about a third of the rise and the price of fertilizer is due to the fact that
we’ve had a change in the exchange rate okay lower value dollar results in
higher costs associated with a pristine over inputs and now since we’re sourcing
more and more of our inputs for a last Shore that’s more important to
agriculture than it used to be Mahone tonight and say you know I better start
watching The Wall Street Journal the business press news week
pardon me a Business Week Forbes fortune maybe I ought to start reading that
stuff you’ve gone home with probably the most important thing
agriculture is increasingly being shaped by what’s going on outside the industry
than what’s happening in the industry increasingly it’s all those things out
there that are shaping our industry not what’s happening within our industry
okay we’ve already talked about public sector AG R&D I’m gonna get on the
soapbox a second it’s okay we have had a window of opportunity in the area of
infrastructure that we may have missed with the assistance package that the
government just signed how much in this commitment to infrastructure how much
specifically was there for rural roads rural bridges rural rail and redoing the
locks and dams on the Mississippi Ohio Missouri Illinois rivers answer is not
much we’ve been worried about our infrastructure and solving our
infrastructure problems which our major our major
it’s relative to Brazil is infrastructure it isn’t because we got
better yields that’s not true they actually have higher quality means
and the cost per bushel for fertilizer seeding chemicals is almost identical in
Brazil as it is here in the US to pusher to produce a bushel beam our
disadvantage is high cost for labor and land but we offset that with very very
good infrastructure so we can ship that stuff around the world they’re solving
their infrastructure problems are we solving ours
we had a window we missed the opportunity in my personal judgment that
was a big big mistake because those windows don’t open up very often for
infrastructure types of investments okay here’s what we talked about in terms of
the value of the dollar we need to finish this up uncertainty certainly a
lot of uncertainty now associated with the agricultural industry I’m just going
to give you a couple of charts here here’s what I mentioned earlier in terms
of the relationship between corn and crude they marry each other almost
completely now everybody remembers the collapse of the corn market particularly
if you were in the corn market like I am you remember the collapse of the corn
market from roughly $8 or 7 plus to somewhere in that 4 to 5 it took us
about what 3 4 months to go through that collapse process right how would you
like to be a fertilizer dealer look at that redline fertilizer D fertilizer
wholesale prices went from 850 a ton to 250 a ton in 3 days never have we seen that kind of action
in these markets and there’s an awful lot of fertilizer dealers that bought
fertilizer laid it in at $800 a ton what the heck are they gonna do I tell
bankers we work a lot with bankers I tell bankers if you had
any fertilizer seed chemical dealers in your portfolio put him on your watch
list because they are much more vulnerable than any other business loan
you have because of exactly this it’s a huge huge issue and many of us are
frustrated with the fact that the fertilizer industry at the retail level
that’s this is not retail this is wholesale at the retail industry is not
making the adjustments in fact I’ve had some people call my Dean and say bulgy
keep saying these things about prices have to come down we don’t want them to
say that anymore right this market has to adjust okay we’re gonna have to have
some reduction in these retail prices but can you understand the dilemma
there’s only about a hundred at the most $100 a ton margin in that fertilizer so
if I have to sell that fertilizer I paid 800 for hoping you know I paid a dollar
hoping to get or 700 hoping to get 800 for if I have to sell that at four or
three I just wiped my business off the map this is capital wipe out stuff okay
that’s why fertilizer dealers are saying we can’t do this we cannot do this we
got to have four and a half or five for this stuff we can take maybe a hundred
or a $200 per ton hit we cannot take a three to four hundred dollar per ton hit
I want you to recognize that we and agriculture think that were the only
ones that have risk right my friends that keep telling that whoa no no other
industries don’t have other risk I say have you ever tried to run a resort huh
you talk about weather risk try to run a ski lodge right or even an energy
company right they got what a risk what happens in terms of weather influences
profoundly the demand for there so there’s a lot of other industries out of
a lot of ado so we got this whole set of risk we have had a profound resurgence
of risk for the agriculture we had an industry to be very frank and the grain
side that a combination you won’t like to hear this but you think about it a
combination of government program section and highly subsidized crop
insurance really for 2002 to 2007 didn’t have much risk that didn’t have good
prices either I understand that but it’s kind of like I’m on a higher wire and
the safety nuts right they’re like I just step over on it now we’re up here
with a safety net down here and the government isn’t managing the risk for
farmers anymore at the same level it was and now the question is what are we
going to do as businessmen to manage that risk okay we don’t have time to
talk about all of this except I just want you to note what I’ve done in terms
of the order here most of the time when we talk about agricultural policy
relative to agriculture we get all hung up on the farm bill
if you are in the livestock business immigration policy may be as important
if not more important to you because your workforce is heavily Hispanic and
you’ve got to worry about how they handle undocumented workers I’ve got a
friend in the dairy business very sizable dairy farm he has a business
arrangement with these seven other dairy operations that are in his consortium
that if he calls them in the morning and says there was a there was a rumor of a
raid last night and half my workforce didn’t show up and by the way we can
document five cases in Nebraska where that is farms not not packing plants
farms where that’s happening okay he’s got an arrangement so they’ll ship him
part of their workforce so those cows get milked okay I mean a strategic risk
huge strategic risk okay immigration policy is a really important part of the
agricultural policy environmental policy food safety transportation just to put
it in context this the implicit subsidy that farmers receive out of the ethanol
subsidy that’s now passed through in terms of higher prices of corn is a
Archer amount of money going to agriculture than what agriculture
receives other farm bill okay I mean if you’re really dollar driven we want to
make sure we get an our share of the government money you worry more about
energy policy than you do about the farm bill okay
and yet our focus has heavily been on no III had to put this in I’m sorry I put
it in in a way but I just had to the current program we have for financial
assistance that Obama has signed now probably the biggest fear I have of that
program is the Buy America Clause every every ton of Steel that’s going to be
used in all these infrastructure projects has to be US Steel if you look
at the history of the depression there were two fundamental reasons why it
lasted ten years and was as deep as it was number one
government intervention too late and inadequate Fed policy too late in an
adequate number to protectionism we turned inward got to protect us from all
those bad people out there in other countries by America I think is a very
very serious concern with this new program we have we don’t have time to
talk about the rest of it I think we’re ready kind of in this situation okay
what have you got for an economist whose theories have recently been discredited
looking for sympathy cards we don’t have really good answers today for a lot of
this stuff we’re searching around for the answer the markets didn’t like I’m
not trying to be political I’m just saying the markets clearly did not like
what the administration this administration is proposing the Marcos
didn’t like what the last administration proposed okay they’re clearly very very
uncertain about this our economic models just have not generally helped us
understand these kinds of problems resource challenges from plenty to go
around to conflicts okay this whole issue of land and open space we again we
don’t have time to go it in detail there’s a lot of stuff we could talk
about here I would just mention the one issue here that I think is really
important for the agricultural industry is this issue of siting and location
particularly as it relates to livestock production okay that is a challenge for
us if I were and this is probably why I’m not if I were the Czar of a public
sector research institution like Iowa State University the number one priority
to maintain the livestock industry in this state or in any state in the
Midwest is to figure out how to make sure that animal wastes do not have odor
and animal waste don’t have water pollution problems we don’t solve those
problems we will find it difficult to put livestock in Indiana Iowa or any
place to be as a matter of fact where you got people in the US people and
animals don’t mix very well okay those problems are solvable with technology in
my judgment those problems are solvable with technology we’ve got a guy who says
I am going to end up being able to put hogs in the in the Hoosier dome the
middle of Indianapolis we’re going to fix that problem
okay I think that’s the number one problem for the livestock industry today
is solving that problem and we got a whole bunch of other issues we’ve
already talked about it new ideas for technology part of the solution to those
resource problems is what we call induced innovation induced innovation is
that when the problem gets more serious enough and it has economic consequences
public and private sector firms do something about it they make investments
to solve those problems right and as a well understood concept in economics is
is induced innovation okay in agriculture there’s a whole set of
innovations that we ought to be thinking about and we’re doing simplify and
automate we’re moving more and more I mean that’s what that’s what triple
stack of full stack beans that’s what Roundup
Ready soybeans are triple stack corn it’s a not it’s a technology that makes
corn production easier and soybean production easier than it used to be
I’ve got a farmer friend who says you know ain’t too hard pardon my English to
produce soybeans these days take so you got four jobs number one you go out in
the field with your cell phone look around call up the local elevator and
say come out and shoot it with Roundup doesn’t take an awful lot of skill to do
that by the way this is a farmer a real-life farmer not me
job number two is planet job number three go out in the field
two weeks later see a bunch of weights call the elevator again and say come on
and do it again and do it right this time number four is harvesting well I know we
got to worry a little bit about the aphids now and I got a few other bugs
out there but see his point was we have simplified soybean production to the
point where you don’t have to be a particularly good farmer to get pretty
decent yields the way we used to have to spend the whole winter trying to figure
out the right kind of weed regime program that my father and his father
had to do we’re taking technology we worry about capital saving or capital
using and labor saving technology actually the technology we’re doing
today I think is better described in terms of simplification technology
simplifying the production processes okay
automating the production process sustaining versus disruptive innovations
this is a business school concept that says what we’re trying to do is have
innovations or we want to look for innovations that disrupt the entire
markets and one of those disruptive innovations is the technology of bio bio
genetics that is going to redefine the health industry and the nutrition
industry when we get those biopharma types of products okay we talk about
biological manufacturing which is not a politically correct thing to talk about
I fully understand but it is in fact the real world today in agriculture biotech
and nutrition tipple stock is an example information PDAs I don’t know
how many of you farm your farm with a PDA but I’ve got a farmer friend who
he’s poor employees every one of them has their own personal PDA okay they
come to work in the morning they get their PDA it has their work schedule it
has a schedule it says between 7:00 and 9:00 you do these things between 9:00
and 11:00 you do these things it tells them what to do and it also says and it
ought not to take you more than this amount of time to do it right at the end
of the day they all bring their PDA Zinn he had by the way they have another the
PDA also has a record if they’re working in the pork operation they keep track on
this record of the feed and what the kind of feed what kind of medications
they did if they’re out there in the in the fields doing things they’ve got a
GPS tied to their PDA just like like you would have if you had a GPS in your
airplane they and and they can they can put in messages in terms of their suite
problem here there’s a tile problem over here there’s etc they can thicken they
just prints out maps at the end of the day they bring their PDA see any hot
sinks them into his information central information system he’s got daily
records he eventually wants to get daily cost information I don’t know why but
that’s where he’s headed okay it then updates the PDA because
maybe arraigned today they’re getting did some things done right updates the
PDA the next morning they get their schedule again that’s done today in
almost all not all a lot of the manufacturing industries that’s the
standard operating procedures okay computer-based processing employees
working with computers it’s coming to agriculture process control GPS guidance
common one that we see today you don’t see very many new sprayers going out of
the manufacturing plants without a GPS and gear will tell you that somewhere
around sixty to seventy percent of their power units have a GPS as standard
equipment okay standard operating procedures all right so let’s talk real
quickly here just for a few minutes we’re going to do a classic two-minute
drill about what the challenges and the opportunities are associated with this
for the agricultural industry we’ve already talked about some of this but
there’s even rather than the bio-based material new
markets in terms of recreational activities you probably don’t have maybe
quite as much of that as we might have in a state like Indiana but you’d be
surprised how much recreational revenue there is coming out of cities of like
Chicago and Indianapolis into the rural countryside for hunting for fishing for
just open space okay just open space go down to Austin Texas and you’ll find
that a large portion of the farmland to the wet to the to the west of Austin to
Austin Texas is owned by people who have bought it they rent it back to the
person they bought it from to run the cattle or do the farming they bought it
simply to get open space and have hunting and other rights okay so there’s
a whole bunch of things that are carbon sequestering energy productions
bio-based market we’ve already talked about that organic natural local now
this is an interesting issue because when I say organic what size farm to
most people think about small not true California has the most organic
production in agriculture in the US over 50% of the agriculture organic
production in the state of California is done by four large farms let me just I’m
not being judgmental I’m just just telling you a fundamental economic
concept any highly regulated market has a high fixed cost component and any
situation we have a lot of high fixed cost you want to have more and more
output to spread those fixed cost small operators struggle with a highly
regulated production system and that regulation doesn’t I don’t mean by
regulation government regulations it could be regulations imposed by the
channel by the buyer and supplier in these markets you got to have you got to
meet certain rules regulations you got have certain documentation gotta have
certain kind of records and I only spread that cost over one incur versus a
thousand acres it gives the advantage to the large operation I’m not saying it’s
right I’m not saying it’s good I’m just saying it is okay and that’s why when
the markets get big enough in any of these niche markets particularly for
highly regulated market what happens is the larger operators have a tendency to
become more dominant in that market now the only part of this that were that
that falls apart though which I think does provide real opportunities for
smaller scale growers is local local does not have the opportunity it’s hard
to be local and producing your stuff in California and shipping a dialer doesn’t
quite cut the local definition right now there’s a whole debate about what local
really is right some people say it’s the same stage some people say it’s the same
community etc what I’m trying to suggest to you is for small-scale farmers they
have a probably a sustainable competitive advantage in local I’m not
sure they do have a sustainable competitive advantage in organic and
natural organic and natural are going to grow to about eighteen to twenty percent
of the market but do you and I think it’s a product with you and I want to
buy is not the question there are some people willing to pay for it although
the growth rate has slowed down recently another thing that we need to recognize
is that some farmers are going to probably make more money not by what
they produce but the services they put around it I’ve got a farmer friend in
Idaho who sells his barley to a brewery commodity brow Raleigh by the way he
used an interesting strategy he went to his buyer and said what can I do for you
to create value well that’s interesting how many farmers go to their elevator
and say what can I do for you to create value well know most of them one
complained because the hours aren’t right right there my customer what can I
do to create value and said can I produce the Democratic barley nope but
we’re really not good at managing inventory they said could you be our JIT
inventory manager what do I got to do Sam said we want to
call you any time of the day any day of the week and have you deliver within
three hours five thousand bushels of barley and we’ll pay you ten percent
premium on all of the barley we buy from you not just that did you deliver under
the jit contract he said I had the trucks had two people a no-brainer and
he said that’s sustainable a lot of other people could produce different
kinds of barley because the markets are going to make that technology available
to everybody but services are hard for others to mimic and we in agriculture
have not thought enough about what we can do to surround our products with
services that are sustainable and will create value there’s a lot of strategic
choices we have to make to manage the strategic risk associated with what’s
going on today the whole question right now short-term of crop mix the corn bean
question livestock choices in terms of can we continue to grow our livestock
enterprises those are strategic choices we have to worry about and maybe we have
to worry about the business model by which we grow it and the business model
one of risk mitigation okay I mean the pork industry has moved very
aggressively to contractual and other kinds of arrangements because it was a
risk mitigation strategy in general and we can tell you stories and stories
about people who have been extremely successful with that business model that
has struggled in some parts of the country to be accepted and I found it
was really really a struggle in Indiana we have a lot of Indiana farmers that
just weren’t willing to go into contract production and guess what they aren’t
producing pigs anymore okay the market changed on them they
weren’t willing to do it closed loop systems co-product production recycling
integrated crop and livestock I think we’re going to see a future of
Agriculture that really integrates crop and livestock production it’s not going
to be the old way though I’m going to have some pigs on my farm what we’re
going to have this is going to have this unit over here producing crops this may
be separate unit over here producing livestock will sign contracts
and other arrangements to capture the synergistic benefits of having crops and
livestock together of animal waste etc but we’re not going to do it in the old
classic I am going to try to be successful in producing both because I’m
not going to be very good at either one of them if I try to do that finally this
whole question of what not to do most farmers have to make some critical
choices in terms of what not to do we don’t spend a lot of time on that we
suggest to farmers that they have to spend about twenty Integra businessman
as well about 25 percent of their time deciding what to quit doing and that’s a
tough thing to do what do I get out of because if I’m going to grow my business
and I don’t get out of something I’m probably going to eventually outgrow my
managerial skill set I may have plenty of capital we have
plenty of other things but I’ll grow my managerial skill set implementing supply
chains tracking and tracing inventory logistics maintaining market access
that’s a key issue a key issue in agriculture as we move away from the
independent business model to models that are more tightly aligned and a lot
of people don’t like that I understand that because it’s challenging some of
our fundamental independence values in the industry but it’s going to be
happening it’s a there’s too many advantages to that and we’ve done a lot
of work in this area research and otherwise to the value of those more
tightly aligned value chains as that happens and it’s going to be really
important for us as producers to figure out how to align with the right buyers
and the right suppliers let me put this very explicitly for you this year you
will find if you haven’t found it already that when you try to buy
fertilizer next year you’re going to have to probably sign a contract and
it’s going to be a contract that says I will probably buy fertilizer from you
for from this dealer for two years and we will share the risk open market
transactions with the kind of volatility we’ve got in fertilizer industry are
disappearing the classic spot market is going away we’re gonna have contract
arrangements in it we actually had we actually had a livestock farmers in the
southeast in the poultry industry come to Indiana last year when ethanol was
growing so fast signing five-year supply contracts for
corn saying we’ve got to lock up our corn supply because we may not have corn
if we don’t do that these markets are changing very dramatically technology
and timeliness we’ve already talked about that as well workflow scheduling
modulated Verity and a pot or replicate strategy that’s that’s the common
strategy for expanding now in most industries agriculture and included is
to use what we call the pod or replicate I find out what the optimal size plant
is whether it be a dairy operation or a set of hog buildings for Smithfield it
was 3,600 sows and then I just build 3600 farms I’ve got a dairy operation in
in Indiana their optimal size plant is 3,000 cows they now have 12 3,000 cows
dairies plants in northern Indiana oh I thought that was California or Texas that business model right there wrongly
is coming to us so the new agriculture and we’ve got time maybe for a few
questions here’s what the new agriculture and my judgment is going to
look like it’s going to provide real opportunity for those who are willing to
think about agriculture in a new context this is not my father’s farming I’m not
saying I wish it was or wasn’t I’m nineteen no judgments here about whether
this is good or bad I’m just saying the economic forces are such that it’s
moving us into a new agricultural paradigm so what we’re going to do is
biologically manufacture specific attribute raw materials for nutritional
pharmaceutical industrial product and uses boy that’s not grow
stuff anymore which is what we do now we’re gonna biologically manufacture
this stuff just a quick comment on that know if you recognize the name Jim
Mosely former Assistant Secretary of Agriculture said farmer in Indiana in
his gym and a meeting once and I said which is which is partially accurate I
said this is one of the most successful pork pardon me
Pig hog farmers in the state of Indiana I’ve known Jim for a number of years Jim
said well typical you know bull cheese you’re wrong most the time said I’m not
a pig farmer I manufacture pork that’s my job
most buildings out there they’re gonna assembly going and you know that animal
walks out of there he’s a carrier I don’t care about pigs
I carry about the products that carry I manufacture pork that’s my job
and that’s what the industry moved to see the same thing happening in other
industries potatoes are there milks go in there tomatoes are there it’s going
to happen in corn beans how they do it integrated value chains enable of
genetics the plate traceability how will we compete better faster not
just cheaper thank you very much I can’t believe you agree with
everything I said question is how will the financial
industry change their method of securitization of loans to make it more
viable and and in the future I think what you’re going to find is a couple of
things happening we we are going to have less securitization in general occur so
more and more of our lending activity will be held in the portfolio and that’s
going to be a constraint on the lending that we can do that’s going to be
naturally kind of restricting the lending activity I mean that’s to be
honest that’s the problem we have right now it’s not that banks can’t make loans
they have two problems it’s not that they don’t want to make loans they have
two problems number one is they are worried about the creditworthiness of
the customer that’s number one number two if it’s a big loan they can’t find
anybody to sell a participation right that market is just absolutely dried up
and by the way that’s relevant to agriculture too that’s not just in the
housing market because a lot of our large agribusiness companies are been
financed with participation and activity and they’re out there struggling
including the Farm Credit System Farm Credit System has got a lot of stuff
that it’s trying to figure out how to work its way through ok so we’re going
to see basically that’s going to result in a in a in a in a reduction in kind of
the ability to have activity in the market we’re not going to have as much
funding because of that the second so you’re gonna have a lot of these that
are going to be put at stay to stay in the portfolio right the other thing I
think that we’re going to find happen is that you’re going to have securitization
but you’re going to have securitization where it’s only one or two steps not 17
where we end up taking and doing the classic swaps and slicing and dicing of
these and put it out into a whole bunch of other institutions right so what I’ll
do is I as a banker will find I have a good solid relationship with you and
with him and with him and so I will basically sell my participation to you
and your portfolio right rather than you saying well I just got to sell that to
the next person down the street and that guy says
I gotta sell it to the next I mean this thing basically if you look at it if you
look at the work that’s been done there’s a company out there that
actually is doing this now a large proportion of these collateralized debt
obligations were not traceable back to the original owner
we had no clue where that money really really what was the security behind that
in terms of the original owner wasn’t traceable there’s a company now that
charges big bucks to actually do that to uncover how to go from this
collateralized debt obligation back to particularly on we’re going to probably
shorten that chain profoundly and have more clear traceability so we can know
so I can know what I’m buying from you and you can know what you’re buying from
me it’s gonna be unwound by variations of what we’re already doing and that is
putting a whole lot of government money out there to buy down bad debt okay
there are people that say there’s about a two trillion dollars of that stuff
still sitting out there dr. Bose you’ve covered a lot of territory one of the
things that that I wish you’d comment on there’s a there’s an organization that
spends about two hundred and fifty million dollars a year lobbying for
animal rights they pretty well destroyed the horse industry at least the horse
slaughter industry do we need to defend ourselves against these kinds of
activists how what what is the strategy for a new agriculture if we have to
fight animal rights yeah I mean so so one could take a kind of a pessimistic
approach to this and say that’s part of the sets of rules that we have here that
you probably don’t have quite as owner us in other parts of the world right
they don’t have probably the same set of rules I don’t think in Argentina Brazil
China or Romania or Poland which is basically aware Smithfield is expanding
its pork operations not in the US they don’t have the same set of rules
that’s kind of fits in with that environmental set of rules that is kind
of what we have now let me let me flip the other side of that ah is there a
little bit of validity in some of these arguments as to how we’re treating
animals you know we have to be a little bit careful that we don’t think it’s all
black and white there’s a bunch of gray here temple grandin whether you respect
her for what she’s done or not has been widely recognized for saying you know
there are some things we can do to structure the loading facilities just
off the farm in a way we treat these animals to reduce the fright that to my
have of getting up on a truck and by the way there’s an economic benefit out as
well or change the unloading facilities and the stunning shoots at packing
plants so there’s I would argue some things that we ought to think about
doing differently in terms of the way we go about treating animals we are going
to struggle in the US with this issue particularly because most people and
particularly children the US think of animals differently than you and I do
and the animal rights people fully understand that they’re very bright
that’s why that’s why for example they initially worked on on trying to get
McDonald’s to change their policies because they knew the McDonald’s sold to
kids that’s why they didn’t go to Burger King because Burger King sells to adults
okay they knew that if they got they could they had a better chance of having
I mean when I take my children in and they’re out there
outside the the McDonald’s door picketing and they’re saying that were
mistreating animals my grandkids asked me about that what do you do are we
doing that grandpa is that what you do in your farm grab them how do you answer
that question without lying to him that’s the reality we face so I think
we’re gonna have to figure out how to improve our practices of how we handle
animals because I think if we don’t do that just like if I think we have to
figure out how to improve our practices of handling animal waste because if we
don’t do that and I and that’s the point there is technology on it to do that we
don’t do that this industry is going to have another reason to go offshore and
it’s got lots of reasons to go offshore anyway it’s probably not the answer
you’d like to hear that’s that that is that is asserted by
some people to be the goal yeah I’m sorry
the the questionnaire the comment was made is that that the the animal rights
industry their fundamental goal is to eliminate completely any animal
production and consumption of animal products in the u.s. that’s where
they’re trying to to be to end up there are some of the more radical parts of
that group that do have that orientation okay I I think we need to be careful
very careful that we don’t brand the entire movement with that image because
what happens to us then is it gives us license to say no we’re not going to
make any changes they’re all nuts right and let me let me just be very
frank if we get into life catfight on this one I predict we will lose well well we’ve careful here because
because we could export every bushel of corn we produce in this country and we
would probably still have a hundred percent of land in production it’s just
going to go produce pick someplace else you’re right in a context of the
southeast us as well as the mountain states that have sufficiently rough land
that are now have beef cows on it will struggle with what their alternative is
you’re absolutely right there okay but there’s nothing that says that if we
produce those animals someplace else that we wouldn’t have the opportunity to
produce the grain here and move it there well there has actually been in modeling
of what the feed cost John Lawrence has been involved in some of that what these
high feed costs are going to do to animal production I think John the
estimates so I had seen you and your shop do indicated that if we have the
four to five dollar corn area we’re going to have about a seven to ten
percent downsizing of the animal industries in this country okay because
of high feed cost okay I mean again I am NOT trying to be a pessimist but I think
the animal industry let me say it differently one of the advantages we’ve
had for the animal industry in this country is we’ve had relatively low feed
okay low feed cost and those those advantages now are disappearing and then
we have on top of that some additional disadvantages that are increasingly
becoming important like issues associated with odor water treatment of
animals etc I think actually those issues the latter issues can be solved
more easier than a feed cost problem I think they’re solvable with technology
yeah I was wondering if you might comment what we sometimes refer to as
secondary or external costs with this model that you are proposing and I’m
thinking of specific water quality issues so this state is number one in
corn soybeans and hogs and from the reports I’ve seen we have the worst
rivers in the Union and we have the most expensive water treatment plant in the
whole world so I’m just wondering if you’d comment yeah see well III think
you’re raising some really important issues that are problematic because our
economic system the way it’s described right now does not force us to capture
those costs the way we do the economic analysis in other words what I’m saying
is that the private sector firms are not incentive or forced to capture those
costs as part of their cost of production so what we’ve had to do is
we’ve had to have public policy that has changed the rules of the game to
internalize those costs another way to internalize those costs is to start
basically saying if you’re going to be creating water problems or air problems
there isn’t going to be a cost associated with that negative good
you’re creating you know we don’t have a tendency to do that and yet in
agriculture it’s done in other industries we haven’t done that
agriculture you know like this but agriculture is well behind other
industries of having to be responsive to environmental issues most other
industries have had to be more responsive part of the reason is because
those industries have been dominated by larger businesses that is perceived
rightly or wrongly they have the capacity to either absorb or pass
through to the eventual buyer those additional costs agriculture is
primarily a small firm industry where those cost would be sufficient to put
them out of business and have very little capacity to pass them along to
the end-user unless they are regulated okay so part of the reason we have been
behind the power curve that I would argue is because of those
reasons but we will we are making changes having to make changes this is
my 33rd year of farming and I studied economics at a different land-grant
College and I think it’s important for the young people here to know that there
have been economists that could have predicted this outcome they couldn’t
they predicted what kind of an agriculture we face today where all the
livestock are in big confinement feed Lots and where we have bigger and bigger
grain farms and this system is spreading all over the world at the expense of
rainforests and savannas and crowding people in the big cities you mentioned
India I saw a program that night on public TV the capital of Delhi has over
2 million people in it and 1 million people live in shanty shanty houses you
know tin shacks with no running water and no sewers and when you talk about
cheap labor like in Brazil that’s where the chicken factories ago that’s because
they have cheap labor they have people that are willing to work for almost
nothing or in Mexico where they make $4 a day so there have been economists that
it could have predicted that and could have predicted the horrendous situation
we’re facing in this country today for instance John Maynard Keynes who said
that we should have international commodity agreements to put a floor
under commodity prices and to end to aim for full employment but wait now he was
demonized and the economists that that gained favour at land-grant colleges in
fact all of the colleges in the United States and politicians were those that
preach through the free market like for instance could you ask a question I’m
happy to reach out ok tell me why the the fertilizer dealers when they were
buying $800 a ton and hydrous in the wholesale market why weren’t they using
risk management and selling a contract in the futures market they hatch their
purchase because there is no such futures contract and fertilizer that’s
the problem there’s no that institutional structures
no not on fertilizer there is a futures contract on natural gas we’ve done work
looking at crosshedges on natural gas it’s not a good cross hedge there are
non regulated over-the-counter opportunities in that but they are not
the kind of stuff that anybody really really feels very comfortable there’s
actually a London exchange that does plane in this area and what there’s just
no there’s no purchase market there why have an economists like you and Luther
tweetIn and Don parle burg supported agricultural policy so that we would
have a floor under farm prices we would have reserves which so that we knew that
the price of corn wouldn’t go wouldn’t go so high as to drive people out of the
livestock industry or or shut down ethanol plants why since you want to
keep the cost in the price of the commodities that’s the kind of policy
that let me comment in two dimensions on it we actually did have in this country
a reserve program we have had farmer reserve our it was an economist that got
rid of that program let me tell you it was farmers that got rid of that program
farmers decided as a group that they did not want to have those reserves
overhanging the market and it wasn’t Don para Berg
I can guarantee you because I know Don now-deceased very well it wasn’t Don
that did that it wasn’t we economists it was farmers well I have to just go back
and look at some books by Ezra Taft Benson and look at the type of
economists that supported his point of view and you’ll know very well in fact
Earl Butz for instance he preached against treaty interrupt and say that
this is a conversation you all could Cantera on later okay so tomorrow up on the college’s webpage
will be dr. bodis PowerPoint and within a week we’ll have the video of today’s
presentation please share it with your friends thank you for coming tonight it
was a wonderful conversation

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