{"id":1549,"date":"2019-07-15T07:56:10","date_gmt":"2019-07-15T07:56:10","guid":{"rendered":"http:\/\/commodityconversations.com\/wordpress2\/?p=1549"},"modified":"2019-07-15T07:56:10","modified_gmt":"2019-07-15T07:56:10","slug":"challenging-times","status":"publish","type":"post","link":"https:\/\/commodityconversations.com\/wordpress2\/2019\/07\/15\/challenging-times\/","title":{"rendered":"Challenging times"},"content":{"rendered":"

Part Two of a Conversation with Howard Jay\u00a0O\u2019Neil<\/strong><\/p>\n

\u201cLet\u2019s talk a little about ASF, African Swine Fever,\u201d I suggested. \u201cIsn\u2019t that a bigger problem for US farmers than the trade wars?<\/p>\n

\u201cIt is a major problem. In 2017, China imported 95 million tonnes of soybeans and we were expecting Chinese demand to exceed 100 million tonnes in 2019. But that was prior to ASF and the tariffs. We now expect China to import\u00a080-84\u00a0million tonnes, a substantial drop.<\/p>\n

\u201cBoth the U.S. and South America have been ramping up soybean production to supply\u00a0a\u00a095 to 100 million tonne\u00a0China market, and now we have only\u00a080-84\u00a0million. I don\u2019t know whether you would call it a perfect storm, but ASF and the trade wars coming together at the same time are having a major impact on trade.\u201d<\/p>\n

\u201cSo the situation is similar to the 1980s,\u201d I argued. \u201cWe have too many beans and too much infrastructure.\u201d<\/p>\n

\u201cI don\u2019t see it as being as bad as the 1980s and early 1990s when margins were negative across the whole industry. It is true we are going through a downturn in export demand. We have surplus transportation, surplus export capacity and surplus ocean transportation. You only have to read the financial results of the big grain companies to see that profits are challenged. But it is not as dark as it was in the 1980s and early 1990s when profits were negative. Although profits now are poor, they are not negative.\u201d<\/p>\n

\u201cWhat do you think about the idea of giving beans away to poor countries as food aid?\u201d I asked Jay.<\/p>\n

\u201cIt is always a question of scale and volumes. We have a 900 million bushel carryout on soybeans this year and most expect that to grow to one billion bushels.\u00a0 That is the largest surplus of soybeans that we have ever had in the US: a\u00a023\/25\u00a0percent stocks-to-use ratio.\u00a0 We also have surpluses in wheat and corn. It will take time to solve this problem; it is a multi-year problem. Giving away a few cargoes here and there of beans is not going to solve the problem.\u201d<\/p>\n

\u201cWhat about the introduction of GM crops,\u201d I asked Jay. \u201cHave these contributed to the surpluses?\u201d<\/p>\n

\u201cVery much so! As well as improving yields, farmers tell me that when they plant GM seeds they are more confident that they will do well even if the weather is bad. By giving farmers a certain comfort level GM crops have encouraged them to plant a\u00a0larger acreage and to get more production per acre.<\/p>\n

\u201cIn addition, we are now planting beans further north and further west than they were planted in the past. Historically in the US we didn\u2019t\u00a0plant large quantities\u00a0of\u00a0corn\u00a0or beans in North or South Dakota; now we do. The same applies to Western Kansas or Western Nebraska. In the last 15 years GM technology has led to a dramatic expansion of production into areas that previously couldn\u2019t\u00a0profitably\u00a0grow\u00a0these\u00a0crops.<\/p>\n

\u201cPreviously these areas could only grow wheat or barley because of the lack of rainfall and the soil type. Now farmers plant GM corn and beans, and they have been displacing barley and wheat areas. The same applies to Canada where the new short season seeds have led to an expansion of soybean production; it may even double in a few years,\u00a0although\u00a0admittedly from a low level.<\/p>\n

\u201cGM technology has enabled farmers to grow corn and beans in areas that historically they have not been able to. GM technology has also contributed to yield improvements in the traditional growing areas. So GM technology has had a very significant impact\u2014and will continue to have an impact.\u201d<\/p>\n

\u201cWhy isn\u2019t there any GM wheat?\u201d I wondered.<\/p>\n

\u201cIf you ask the seed companies they will tell you that corn and beans are much bigger crops\u00a0by planted acres, and are commercially more attractive to them than wheat. In addition soy meal and corn are largely used for animal feed. Wheat is\u00a0mainly\u00a0consumed by humans.<\/p>\n

\u201cIn 2008\/2009 the US farmers did ask the seed companies to develop GM wheat; yields were not increasing as much as in corn and beans, and the US was losing wheat acreage to those two crops. But when they asked the Japanese flour millers, who are major buyers of US wheat, they said they would not buy US wheat if it were GM. As a result, GM wheat was put on the back shelf;\u00a0as it was considered\u00a0too market disrupting.<\/p>\n

\u201cSome test-plot research on GM wheat has been done in US, Canada and Australia, but so far there\u00a0has\u00a0been no commercial production. There have been\u00a0three\u00a0what you might call \u201coutbreaks\u201d of GM wheat, one in Canada, one in Oregon and now one in Washington State. An environmental group discovered a few GM wheat plants in among non-GM wheat and alongside a dirt road, but admittedly a significant distance\u2014hundreds of miles\u2014from any GM test sites. No one knows how those plants got there.<\/p>\n

\u201cThe Japanese put a temporary embargo on US wheat when it was discovered in Oregon, and later on Canadian wheat when it was discovered there. They introduced a testing protocol, but no GM wheat was ever found in any shipment and the embargoes were short-lived.\u201d<\/p>\n

\u201cGoing slightly off subject, you recently retweeted a cartoon on Twitter showing organic farming using more land because of lower yields. Is that your view?\u201d I asked.<\/p>\n

\u201cOrganic farming has lower yields than non-organic farming, so you obviously need more land to get a similar production. More carbon is released in the process. A greater agricultural area also means less forest and less biodiversity. Many people believe that organic food is better for them health wise than non-organic. I don\u2019t personally agree with that, but that is the perception among some people\u00a0and that has created a small percentage of specialized demand for those commodities and products.<\/p>\n

\u201cNow changing the subject completely, would you recommend your children to become farmers or merchants, or neither?\u201d<\/p>\n

\u201cI have two kids,\u00a0neither of them have an interest\u00a0in either farming or grain merchandising. Farming is not a business. It is a lifestyle. It takes place in rural areas,\u00a0often in isolated areas,\u00a0takes long hours of hard work, and that is not for everyone. As a result many young people don\u2019t want to continue family farming. They want the social life\u00a0and types of jobs\u00a0that can be found in metropolitan areas.<\/p>\n

\u201cFrom an economic standpoint, farming is cyclical. We are currently in a down-cycle with low profitability. As a result, it is difficult to obtain capital to buy land or equipment. The farmers that are doing OK now have been farming for generations; they have low debt. It is not a\u00a0positive\u00a0economic proposition to buy a farm now and equip it. You have to like the lifestyle\u00a0and be in it for the long run.<\/p>\n

\u201cAs for grain merchandising, yes I would recommend a young person to go into it. In the long-term I\u00a0 expect it to be a financially worthwhile and intellectually interesting career. But a lot of the grain companies are currently going through restructuring and laying off staff. We are at that stage in the cycle, but we have been through many cycles before, and I trust that we come through it as in the past.<\/p>\n

\u201cHaving said that, the rise of the US ethanol industry had increased competition for grain in the countryside and made things more difficult for the grain merchants. They are no longer the only buyers.<\/p>\n

\u201cAnother thing that has changed is that farmers are now storing their crops in their own on-farm storage facilities. Today 55 percent of grain storage capacity in the US is on-farm; only 45 percent is commercial. It used to be easy for merchants to buy cheap grain at harvest time, store it and sell it later. Domestic, as well as export, markets are more competitive now, and handling margins have narrowed.<\/p>\n

\u201cAn additional problem today is that political interference is difficult to predict. It is impossible to guess how long the trade wars will last. Some trade houses expected the trade war with China to be short-lived; they were wrong-footed when it persisted.<\/p>\n

\u201cBut taking everything together I have had\u2014and continue to have\u2014a fascinating career in the grain merchandising business. It has been challenging, but it has also been rewarding both intellectually and financially. So yes, I would absolutely recommend young people to join the sector.\u201d<\/p>\n

\u201cThank you, Jay for your time and your input\u201d.<\/p>\n

\u00a9 Commodity Conversations \u00ae<\/p>\n","protected":false},"excerpt":{"rendered":"

Part Two of a Conversation with Howard Jay\u00a0O\u2019Neil \u201cLet\u2019s talk a little about ASF, African Swine Fever,\u201d I suggested. \u201cIsn\u2019t that a bigger problem for US farmers than the trade wars? \u201cIt is a major problem. In 2017, China imported 95 million tonnes of soybeans and we were expecting Chinese demand to exceed 100 million … <\/p>\n

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