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Raymond J. Learsy

Raymond J. Learsy

Posted: February 27, 2008 08:42 AM

Food is Becoming The New Oil, OPEC Shows The Way as Grain Prices Reach New Heights

What's good for the goose is good for the gander. As the world's governments acquiesce to the outrage of OPEC's collusion to manipulate the price of oil another storm is looming in the near distance. Grain prices are lurching forward. Wheat prices have reached new records and soybeans (including soybean oil and soybean meal) and corn are there as well. The UN is warning on the impact of rising food prices cautioning many nations may not be able to cope. Argentina, Russia and Kazakhstan have imposed restrictions on grain exports.

Where are prices going and what is at stake. Yesterday the price of wheat touched and passed $12 per bushel on the CBE. According to the USDA the variable cost (seed, fertilizer, energy) to grow plant and harvest an acre of wheat is $91 per acre. Each acre yields some 42 bushels of wheat (subject to some regional variances of course). Thus it costs approximately $2.61 to grow a bushel of wheat. Add to this the annual carrying cost of each acre of land, which can vary depending on local land values, land taxes etc. A figure of $1.75 per acre would be a fair estimate. Thus the cost to produce a bushel of wheat to an American farmer could be reasonably estimated at $4.36 per bushel.

At $12 a bushel per the calculations above, this would accord Farmer Jones a profit of just under $8.00 per bushel, a level as close to heaven as he has ever been even though it begins to present economic and social dangers for the rest of the world.

But wait, before one begins to pontificate about our farmers enriching themselves on the backs of the masses, consider this -- the price of another vital commodity, oil. Let's compare some profit margins. Here is our Farmer Jones, hard worker and diligent as he is, enjoying the fruits of his labor and enjoying a return of 300 percent, margins he has never seen before. Nothing to sneeze at but still pony league compared to the giants of finance who have been shown the door at Citicorp, Merrill Lynch and Countrywide.

Yet when it comes to bonanzas our friends in places like Saudi Arabia and Kuwait truly take the ring. They and the other charter members of OPEC have no limits to their rapaciousness. Today they are allocating oil (as in production quotas) to us and the rest of the world at prices that now exceed $100 a barrel. And this for the Saudis and Kuwaitis at production costs that are less than $1.50 (one dollar and fifty cents) a barrel.

So our Farmer Jones gets dirty looks with his 300 percent margin. This while our Saudi and Kuwaiti friends are welcomed in the halls of government and civil society with margins exceeding 6500 percent. The price of wheat with the same multiple would reach $283 per bushel. Let me repeat that number, $283 per bushel.

At those levels Farmer Jones would have to build a bunker on his farm spread and stock it with ample supplies of vintage wines and the best Kentucky bourbon. A lot of people are going to waiting outside with pitchforks.

If the agricultural sector was doing to us what the OPEC led oil patch is getting away with, the howls of outrage would be worldwide. Food riots, rationing would be the order of the day. Yet the oil sector gets away with the most outrageous market manipulation colluding to mark up their commodity to the most outrageous levels, and this outrage is met with barely a beep.

Ah, but you say, these are different commodities. Oil is finite, and if you believe the peak oil pranksters, in precipitous decline. As I have posted before, that is a highly questionable perception (see "Peak Oil is Snake Oil" 06.25.07), used all too willingly by the oil producers and their flacks to rationalize ever higher prices.

But that is not the point here. You see wheat, corn, soybeans are all in their way consummately finite. Without such mineral nutrient inputs as phosphates, potash, nitrates/nitrogen at planting, crop yields would collapse with crippling famine sweeping large swaths of the planet. And if oil is finite, then too are these basic minerals, the building blocks of chemical fertilizer. Not only are they as finite as oil, but often more limited and more difficult to access. Think the end of the "Green Revolution".

While the price of grains move sharply higher, there is no moral equivalence to hold them in check until outrage and concern is expressed and steps are taken to address the consummate distortion in the price of oil. Remember as we started, what's good for the goose is good for the gander.