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.
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Mr Learsy again fails to connect the dots nor admit the obvious- namely that scarcity equals higher prices. Not only with oil, but also with agriculture. Nowhere in his post does he acknowledge that supply/demand is being pushed to the limit. Last year was one of the poorest world-wide crops ever. We currently have only a 50 day reserve in wheat. On top of this, the shifting of food-to-fuel is driving prices higher.
Mr Learsy says "[peak oil] is used all too willingly by the oil producers and their flacks to rationalize ever higher prices". The problem with this assertion is that nobody in big oil is actually saying this. On the contrary, there is a reluctance to come clean with the real reserve numbers as these would scare us all into a major shift towards alternative energy and away from their product(s). Most Oil executives, Mr. Learsy, Dick Cheney, et al (The "Oil Cornucopians") want us to party on with our "non-negotiable" life-style and punish anybody who gets in our way.
Sorry, this party is almost over and the lights will turn itself off.
Nobody talks about the elephant in the room-TOO MANY PEOPLE ON THE PLANET!!!!!!
Ok, lets talk about it. What's your solution?
I guess poverty and famine could help?
While the neoconmen have been able to run rampant through our economy, they are in their "last throes". When george and his ilk are reduced in Jan., there may be inspectors hired or even oversight done. They are raping bank accounts while they can do so unabated. Won't it be something if we can find out what the hell has gone on for 8 yrs.??
This is simply overt let's have the Americans bomb the lil' brown oil men Racist Israeli propaganda which ignores the decades of collusion of American and European oil corporations in price fixing and violations of the Rico Act between one another.
That said;
Have you seen the map (yes whatreallyhappened has a link)that shows just where and to whom the lions share of tax dollars go -and the amounts- to suckle the pore hard working taxpayer subsidised farmers? Personally I had no idea that so many farmers lived in Manhattan and I don't mean Kansas Dorothy.
There's this old story about a farmer who wins a few million bucks in the state lottery, and when the reporters ask what he's going to do with it, he answers: "Keep on farming till it's all gone."
The key here is that the United States provides all sorts of supports for our farmers. Therefore, overall, all farmers should have to enter into an agreement that if grain is going for $12.00 a bushel on the world market, then so much of that should have to remain domestically to repay the government for price supports, crop insurance, etc.
Let's say they are compensated at $8.00 per bushel and must sell half their crop for that, and it remains domestically and the food here must not rise, either.
Then, they are free to sell the rest. Let's say that Saudi Arabia needs wheat, corn, and other foodstuffs, then let them pay say, $20 a bushel, and it becomes a win-win situation for our farmers and the United States and the world. Venezuela is another country where they import the overwhelming majority of their food. Raise their oil to $100, then their food gets hiked, as well.
Besides, my husband and son are both in the oil industry and it is not so much the oil producing countries who are driving this up, it is the oil companies and oil traders.
There is more than enough production, we are short somewhat on refining, but NOTHING JUSTIFIES THESE PRICES, PEOPLE. The companies and the traders are SPECULATING AND MANIPULATING THE OIL PRICES AND THEY ARE THE ONES WHICH SHOULD INCUR OUR WRATH.
As for the oil produced here in the United States, then perhaps, we should consider a tax on any and all oil produced in the United States, as it is A RESOURCE OF THE COUNTRY, in which fully fifty percent of anything over $90 a barrel is a TAX, GOING TO THE GOVERNMENT to assist our citizens with costs of energy.
Peak oil is no theory. The price of oil is high because production has been at plateau for the last 3 years. This plateau will last for some time, then production rates will fall. It is an inevitable fact of geology that oil is finite. Fertilizer is made from oil, which explains high food prices. Peak oil means peak food. Watch the documentary 'Crude Awakening,' and wake up to the reality we are all facing. Shame on you, Mr Learsy, whoever you are.
If oil production is at a peak then how can Opec cap production at less than 100 percent? Your chasing your tail.
They may say they are at less than 100%. Do you believe them?
The problem you describe is in your description of the problem. People have lived for centuries sans oil, but people have been doing agriculture since before they inventing writing. Hence, when OPEC gets all greedy with the prices, people figure: OK buttheads, we'll just ratchet back and choke off demand a bit. We can do that with food, but to a much more limited extent, and that is the fundamental ethical problem - what's sauce for the goose is sand for the gander.
Why? Because we're at peak with the oil. Production has been basically flat since May 2005. It's not for want to trying - it's that the biggest fields are dying - Ghawar, Cantarell, Burghan, North Sea, Texas, they're all in depletion mode. To compensate the loss of liquid fuels, ethanol now puts the farmer in a position new in history - to choose markets: fuel or food - who's paying more? The result? Food skyrockets.
So, the TRUE ethical issues are not what the farmer is faced with, or what OPEC is faced with. The problem is THE LIFESTYLE. The suburbs, driving SUVs, flying around the planet for vacations, the existence of cities like Las Vegas, Los Angeles, and Phoenix, and the population explosion going on all over the place: THAT'S the ethical problem. Clinging to this unsustainable lifestyle and making more babies that do the same.
I have worked on several farms and been around farmers all my life. And while I do think the demise of the family farm is a travesty, I also resent the fact that so many of the farmers that I know either have to or want to buy new equipment year in and year out. I have known a bunch of good old boy farmers that always have a new top of the line truck and money to burn but cry poor. But when a new tractor is 150k+ and a combine is 350k it is no wonder that a couple of bad years will kill them.
While I think that a higher grain price would be good for the farmers, I have to question how much of that money the regular farmer will see. Between the corporate farms and the commodity brokers I bet it will be damn little. Factor in the much higher fuel and chemical costs recently and I bet it won’t ensure a good year.
good point.
Those are certainly good points.
Unleashed consumerism affects farmers as well as the population at large.
The mega-corporate farms are the ones that will profit from subsidies while any hope of the family farmer getting a decent living will be sidelined by greedy middle men.
Hi!
OPEC's "collusion" and "allocating oil"?
You are dead wrong, and this is a major problem we're having in America.
OPEC is pumping out oil as fast as they possibly can. The current oil prices are very, very bad for OPEC. Because oil prices are so high, many people and organizations are putting big money into alternative energy. They will be successful, and, sooner rather than later, the world won't be buying all of OPEC's oil, and their money flow will be curtailed.
The reason that oil prices are so high, is China (and India), and the fact that all the easy to find and produce oil has been found.
Globabl oil production, TODAY, does not meet global demand, TODAY. We can cut down our oil use here in America gradually, but it won't affect oil prices, because China is using more and more.
The only way to reduce the price of oil, is to reduce our dependency on it. OPEC has lost control of oil pricing, and will never regain it again.
cliff
KYIP
It's too bad there is no check on accuracy for bloggers here.
The rise in the price of oil has been affected primarily by speculation in the commodity markets and the fall of the dollar. OPEC is the same organization that existed when oil was under $20 per barrel.
If you want to blame the real culprit, blame the same financial manipulators that brought us the subprime debacle.
Greed.
Greed will destroy America, just as destroyed Rome.
The "experts" can bable all the non-sense they want. It is simple Karma.
America kills innocent men, women and children to fill the pockets of the il and Arms barons and calls it "fighting-Terrorism." What a joke - a bad joke - and the punchline will be millions of cluesless Americans lining up in soup lines and selling apples in the streets.
The great Depression is of the 30's will seem like a good time compared to what American's are in for.
So watch your "reality" shows and keep filling up your SUV's - the party is almost over !!!!
I agree that the Financial Speculators are to blame but I also think that these people may very well be members of OPEC.
Have you ever been to an auction and seen someone intentionally biding up the price of an object with no intention of buying? So if you have several hundred billion dollars at your disposal you could make a hell of an impact in a market just taking the chance of buying your own product.
As far as OPEC being the same as they were when oil was $20 a bbl I think you will find they are much bolder and not under any real pressure from our government to stay reasonable.
Also let us not forget that the War in Iraq is keeping a whole lot of oil off the market. So it is a war for oil but not for more oil but for less oil.
And OPEC is the same organization that brought about two energy crises in the 1970s. What happened in the early 80s was that new sources - Alaska and the North Sea - came fully on-line. At the same time, conservation efforts in the industrialized world resulted in significant improvements in the efficient use of energy. People like to knock Carter, but conservation policies of late 70s contributed significantly to lower prices in the 80s.The balance of supply to demand was altered favorably and caused the bottom to drop out of prices, exacerbated by OPEC countries having absorbed revenues into their economies, being unable to quickly slash revenues, and thus backstabbing each other by producing over quotas to keep revenues flowing.
Since Reagan, American efforts at improvements in efficiency have been dropped, China, India, Southeast Asia and the former Soviet Block have joined consumerist society and demand has skyrocketed. If every adult in China gets a moped, China's demand for gasoline would exceed that of the US.
We can debate peak oil on a global scale. In the North Sea it's a reality, with both Norway and Denmark downgrading their estimates of recoverable reserves during the last year.
OPEC is back in the driver's seat again, just like during the 1970s.
Too often in this country Farmer Jones turns out to be Farmer A. D. M. Jones and his buddy Farmer Connie Agra. Small farmers? Plow right on, I hope you're making 300%. Kulaks? Well, we'll discuss it one day. Agribusiness? Expropriate the expropriators!
Da, ya soglasna.
You should study up a bit on the CAP(common agricultural policy) of Europe.
Farmers in America have been treated like shit by the market and the politicians. It would be nice to see them attain properity, lasting prosperity. The problem of course is the range of yield (bushel per acre) with natural endowments of land (fertility and annual rainfall). So it's tough arithmetic for a single price to be a fair price.
And so it goes. OPEC is tolerated and respected by our Pols, yet our own farmers are treated like dirt.
OPEC breeches "free trade" but not a single politician in the land has the balls to stand up. Sanctions, anyone?
The real problem is that agricultural subsidies largely benefit the large-scale agricultural interests (Archer Daniels Midland etc.) rather than the small farmers. If they got rid of all subsidies the small farmer would probably be no worse off: it's his big competitors who'd take the hit.
Abolish the Department of Agriculture!
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