Farmer’s Markets

September 16, 2013 |

farmers-marketAs farmer’s markets boom — bringing great foods and prices directly to consumers — what can we learn about the real story of food vs fuel, when it comes to the use of crops that can be refined into either?

The Digest looks at the data on food — and finds some surprises for those marketing the “food vs fuel” storyline.

Practically any day of the week — but especially on weekends — around the US, there are busy and colorful farmer’s markets.

There are 8162 of them across the country, according to the USDA. None of them sell fuel, just food — despite an alarming amount of coverage of the issue known as “food vs fuel”.

Why is that? Well, at our local supermarket this week, white corn is selling for $0.33 an ear. That works out to a value of around $16.00 per bushel — more than three times above the $5.00 per bushel price reported by USDA for Kansas City US No 2 rail White Corn.

(BTW, white corn – that’s the corn you see in the supermarket. Yellow corn, used for ethanol, is not suitable for human consumption in ear form.)

Capturing all that margin, traditionally enjoyed by the middlemen — well, that’s the economic driver for farmers to participate in local markets. Selling fruits and veggies that are too ripe or fragile — or don’t meet the size standards — for the established supply chains and packaging systems — that’s another reason.

And consumers, in turn, can get some pretty good prices as well as amazingly good, fresh food. They also draw traffic for other retailers — and in the Digest’s west coast home in Temecula, CA — we have two markets, and our local retailers are pretty jumped-up over the traffic they drive to historic Front Street and its antique and curio shops.

When it comes to fuel — well, there are co-ops around the country, too. Plenty of farmers sell product directly to local groups that make, for example, biodiesel. But there are nowhere near 8,000 of them.

One of the reasons that farmer fuel markets haven’t developed is that, in the food markets, there’s a much higher mark-up for the middlemen and the processors. There’s about a dime’s worth of corn, for example, in a $4.00 box of Corn Flakes — even though it is the dominant ingredient.

Over to the fuel markets

In the fuel markets, RBOB gasoline wholesales at $2.75 at the moment, and is retailing at $3.58 (US average) — and that includes an average of $0.495 in taxes per gallon. With taxes excluded — to make for an apples-to-apples comparison with food — the mark-up in fuels for the middlemen is around $0.33 per gallon.

That’s around 5.5 cents per pound of fuel. Now, imagine if the same kind of economics ruled in the food markets. Why, an ear of white corn, at 10.2 cents wholesale, would run 16 cents an ear retail. That’s less than half of today’s price. And imagine if you added up all the ingredients in a box of corn flakes why, the price would tumble furiously if fuel market economics applied.

You can imagine, with those kinds of economics, that if you were to construct a scaffolding of demand for corn — you’d put the consumer food markets right at the top of the pyramid. If farmers and processors could find ways to distribute more corn into the food marketplace — they surely would. They look to develop new applications all the time — one of the reasons that corn syrup has figured so prominently in US diets in recent years.

Fuel — well, it’s not exactly an afterthought — but there’s far less profit available to the supply chain, delivering biofuels than delivering foods. It’s an important market, but an entirely secondary one — designed to take excess corn production, provide it a market, and thereby help farmers get economies of scale and establish a floor price for corn so that overproduction doesn’t lead to massive price cuts — the kind seen in the 1980s during the years of Farm Aid.

Those kind of crises — well, it’s in everyone’s interest to avoid them. They lead to financial crises in the Heartland, and can trigger pretty massive relief payments to farmers designed to keep them in business. No one needs the US agricultural system to go under. No one has a strategic interest, here or abroad, in reducing global food security.

Speaking of food security, there’s an argument going around that biofuels cause food prices to skyrocket, and cause global starvation and hunger.

Hunger and corn: the data

Let’s look at the data on yellow corn.

The September yellow corn contract on CBOT is running $4.50 — adjusted for inflation since 2007, when RFS2 was passed, that works out to $4.05 in 2007 dollars. Corn that year sold for $4.20 on average, according to the USDA.

(No, we haven’t cherry-picked some absurdly high or low baseline year to make comparisons from — adjusted for inflation, that $4.20 figure for 2007 is at the median line, over the past eight harvest years.)

What inference can we draw from the data? Grain markets are immensely complex and resist easy analysis — but if you have lower prices now than six years ago, it’s not exactly a stunning argument that the RFS2 is, in itself, the driver of changing corn prices — much less food prices.

Now, let’s look at acreage. One of the arguments going around is that ethanol mandates distort markets by encouraging farmers to plant corn. Now, in corn/soybean country, do we see a dramatic drop-off in soybean acreage as farmers rush to corn? Well, not exactly. Soy acreage back in 2007 was 64 million acres. This year, the figure is 77 million acres.

Could corn acreage get any bigger?

But, plainly, the corn acreage we see this year must be some kind of record for the US, given the ethanol mandate, right? 93 million acres — that must be the all-time high — a sign that biofuels are driving a frenzy in corn growing that is going to put every other crop out of business, use up all the acreage, and cause global starvation.

Actually, that would be 1918, when 110 million acres were planted for corn. 20 percent higher than today.

That was a record year, 1918. A three billion bushel harvest, first time that threshold was crossed. Now, ethanol wasn’t much of a factor then, by and large.

This year, the US is expected to produce 13.8 billion bushels. So let’s make allowance for the 13.8 billion gallons of ethanol that use up roughly 4.75 billion bushels of corn.

The bottom line

So what’s the storyline? The US is producing 9 billion bushels of corn for the feed, food and export markets off 93 million acres. That’s triple what it produced for those markets in 1918 off 110 million acres. We might add, that’s more than the US produced for those same markets in 2002/03, when the ethanol boom first took off. At prices for this year lower, for all markets, than in 2007/08, when RFS2 was passed (when prices are adjusted for inflation).

So, what is the storyline? It’s a story of productivity rising (drought years like 2012/13 being an exception)— and of the opening up of a new market to absorb all that added production capacity.

In that respect, it’s not completely unlike the opening up of the “Farmer’s Market” sales channel in recent years — to absorb production that otherwise wouldn’t find a home in the established supply chain.

So, why shouldn’t we take our focus off the canard that it is either food or fuel — and turn our attention to the most effective ways that consumers can take advantage of the bounty that scientists, farmers and the good Earth has provided.

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