When the stock market drops by 40 per cent, what happens? People get upset. Really upset. The world’s leaders hold emergency meetings. Virtually every economist quoted in the financial press agrees that the “free market” system got completely out of hand, turning into a system to capitalize gains and socialize losses. Governments are taking equity positions in banks, and the entire world financial system is likely to be reorganized to an extent not seen since the Bretton-Woods agreement following World War II.
What happens when grain and oilseed prices drop even further than the stock market?
Not much, apparently.
After all that talk about how the world was running out of food, and how farmers should increase production and quit making ethanol so there was enough to feed the world’s hungry, they’re rewarded by plummeting prices.
Where are the outraged statements from farm representatives? Meanwhile, fertilizer maker Agrium this month reported third-quarter net earnings of $367 million, more than seven times higher than the same period last year. On the other hand, Mosaic recently reported first-quarter earnings that were lower than analysts expected. CEO Jim Prokopanko told reporters that Mosaic would respond by lowering phosphate production “due to excess phosphate inventories in global markets.” And you paid $1,500 a ton because you thought there was a short supply.
While the recent price collapse corresponds with the general world financial crisis, it’s not as if this is anything new. Five per cent less than world demand is seen as a shortage, driving prices up. Five per cent more than demand is a surplus, and prices plunge below the cost of production. It happened in the mid-70s, early 80s, mid-90s and now again, leaving farmers with a hangover that lasts several years. For relief they go cap in hand to governments, drawing criticism for needing continual handouts.
Inevitably, individual farmers try to grow their way out of the problem by producing extra volume to offset the low price, which collectively means more supply – and even lower prices.
The last market downturn sparked a new response – ethanol. Farmers lobbied governments to provide ethanol tax breaks so there would be a greater demand for grain. Whether you’re for or against ethanol, the point is that the policy worked. When it did, there was a backlash, and accusations that using grain for biofuel was driving up food prices and taking food from the hungry.
Grain prices have fallen, but now farmers are stuck with the aftermath, especially now that the mainstream business media is enthusiastically reporting the financial problems facing U. S. ethanol plants. It used to be that farm subsidies were generally seen as a necessary evil for the average honest man or woman of the soil. Ethanol has put the farm lobby in a completely different light – it’s seen as representing corporate interests gaining advantage at the expense of housewives paying higher food prices. That’s not only true in the U. S. Canadian media have had a field day commenting on the slick lobbying efforts of the Canadian Renewable Fuels Association and former executive director Kory Teneycke. He now has a new job – Prime Minister Harper’s chief of staff.
For the past several years, farm program dollars have been available from strong tax revenues. No longer. Farmers will how have to get in line behind laid-off loggers and auto plant workers, all wondering about why farmers didn’t cash in on those high prices, so widely reported a few months back. Interestingly enough, the farm groups that have the ear of the government are the ones that say farmers could have cashed in if it weren’t for the wheat board, so relieving the board of its monopoly will allow the government to say it’s doing something to help the farm income problem.
Not that the future of government assistance hasn’t been clear for some time, with successive governments pushing margin-based programs. If farmers want a decent return, they need to join with other sectors of the economy in making a strong case that they are victims of a dysfunctional pricing system. That means promoting ideas such as international stock holding mechanisms to ensure supplies, and minimum and maximum prices for farmers.
Don’t be surprised if the new Obama administration examines this idea. Some say such systems have been tried before, after a while they failed. That’s true. But is the current system a success? With their silence, farmers are saying that it is.