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How should producers prepare for this fall?
By Lisa McCrory
It is a daunting task trying to make sense of the organic grain market right now; prices have been increasing in the organic and conventional sectors with no apparent end in sight. Flood waters rising in the Midwest and drought conditions in parts of the Northeast leave the 2008 crop year forecast looking less than positive which only drives the prices higher. We are in a period where we do not have enough data yet, but by the time this article makes it to your doorstep, perhaps we will have a better grasp on the number of organic crop acres and anticipated yields for this year’s corn, soybeans, wheat, barley, and other small grains. Prices for various commodities seem to adjust daily as information or rumors travel the airwaves. As we all keep tight watch on the rising cost of fuel, the same sort of close supervision is taking place with our livestock feed. So far, the price hasn’t gone down, and no one can yet predict the point where producers might stop buying or when the price will stabilize. All the available evidence suggests that current corn prices reflect a sustainable future for corn growers as they achieve a level of payment that reflects parity.
According to the USDA Agricultural Marketing Services (as of May 08), organic soybeans are twice what they were last year and organic corn is 70% higher according to Midwest prices and about 54% higher in the Northeast. (See graphs and charts inside, on pages 20 and 21, showing organic corn prices and organic soybean prices from February9, 2007 – June 14, 2008.)
According to AP Business Writer Stevenson Jacobs, ‘the floods have engulfed an estimated 2 million or more acres of corn and soybean fields in Iowa, Indiana and Illinois and other key growing states’. This, in effect, is making the prices for grain increase at a more dramatic rate as a result of fears of a much smaller corn crop. A few other driving forces that have increased prices for organic and conventional feed is the production of ethanol as an alternative fuel source, developing countries like China and India are scrambling to feed people and livestock, and a strong international market for conventional dairy products.
To try to understand the future of organic grain prices, a number of individuals intimately involved in the organic grain world were contacted to comment on the following questions:
Individuals contacted were Klaas and Mary-Howell Martens of Lakeview Organic Grain in Penn Yan, New York, Rick Dutil of Green Mountain Feeds in Bethel, Vermont, Lynn Clarkson of Clarkson Grains in Cerro Gordo, Illinois and Oren Holle, Organic Farming Agency for Relationship Marketing (OFARM) President in Kansas and Darlene and Dan Coehoorn, organic dairy and grain producers in Rosendale, Wisconsin.
In the Northeast, both Rick Dutil and Mary-Howell Martens agreed that there is plenty of corn and tonnage is lasting longer because producers are feeding less grain. Producers are also reducing the protein levels in their grain mixes now that their animals are out on pasture, which is helping the small amounts of available protein feed to stretch until the 2008 crop harvest. Rick said farmers are having a hard time paying for their feed and their receivables are reaching levels that are unacceptable and threatening their ability to run his businesses..
It was agreed by all that it is hard to tell what the crop year is going to look like this early, but the lower the yields, the higher the prices will go – and many are guessing that the crops this year will be less than 100%. “This is a year where we could have used 200% of a normal crop and we are facing only 70% of a normal crop right now”, says Lynn Clarkson of Clarkson Grains, referring to cropland between Colorado and Ohio.
Rainy weather delayed planting for some, which will put an additional cost on potential yield. Ponding of water in areas of flooding and excessive rains are indicating that a percentage of the crops (5-10%) may be drowned out. Some fields needed to be replanted and there is a concern that there may not be enough seed available for this. Oren Holle, President of OFARM agreed that there is a shortage of organically certified replanting seed (corn and soybeans) and that, to the extent that the NOP rules will allow, farmers who cannot find the seed they are looking for will turn to untreated, non-gmo conventional seed. With additional field work to cultivate and re-plant (sometimes including sub soiling to break up compacted soil from flooding) and the investment in extra seed (which is getting more expensive every day), an additional burden will be placed on the final cost of grain for this year.
New Land Transitioning In?
Klaas and Mary-Howell of Lakeview Organic Grains were the only ones to report an increase in organic acreage. Organic crop acres have increased by about 50% in NY over the past 2 years, and the crops were planted in a timely way this spring. “NY has the largest [organic] corn crop year than ever before”, says Klaas. “If we have a normal year, we will be looking for markets [exporting outside of the state].” But the eastern US has been experiencing drought conditions, so that will have an effect on the success of the crop year and there is a lot of the growing season remaining.
In the Midwest, there has been zero growth in organic crop land and in fact some producers have switched back to conventional production because the prices are so good and “there’s nothing convenient about organic agriculture” says Lynn Clarkson, “you have high management, limited markets, and it is difficult to find more land resources in North America“The same pressures on agricultural land are happening around the world right now. With the escalating price for fertilizers and chemicals, we may see organic production methods looking more and more attractive, which may or may not lead toan increase in organically certified crops.
Factors Affecting Price and Availability
So what is affecting price and availability? In general, people are assuming that tonnage will be short this year and much of the corn that is for sale is, in a sense, being set aside to wait and see. Other factors affecting price include speculators and Hedge Fund investors who are joining the commodity market as they exploit the uncertainty and short fall in supply against rising markets. There is also an increased level of opportunism, some might say an increased level of greed, on the part of the sellers to maximize their profits. Grain growers also realize that their cost to grow corn in the future years will dramatically increase and they are hedging their risk by maximizing their profit this year. ‘If there is a drop in feed prices, it probably won’t happen until the fall of 2009”, says Rick Dutil, “Grain farmers [and speculators] will hold onto the high pay price as long as they can.”
Oren Holle, a grain producer in Kansas and President of OFARM, felt that there is no reason to apologize for the fair price being paid to grain producers; it is a long time coming. He also said, however, that we need to find ways to bring other sectors within organic into balance with grains, recognizing that organic dairy is probably at between 50-65% parity right now.
Forward contracting is difficult to arrange at this point in time; producers are holding a little longer to see what the growing season has to offer. Rick Dutil has been successful with forward contracting, but calls it a betting game and at one point or another, he admits his betting career could take a dive. Lakeview Organic Grain contracts with a couple farmers as a safety net. If farmers decide to store and not sell at harvest, they will have their contracted acreage to fall back on.
Oren Holle and Lynn Clarkson work mostly with corn and soy producers. The typical rotation in the Midwest is a 3-year rotation of corn, soy and wheat. To venture off of that rotation is rare for most producers, though there are a small percentage of more diversified farms growing forages and small grains as well. For Lakeview Organic Grain, 95% of their small grains, 75% of their corn and 80% of their soybean come from New York. They are hoping that these percentages will increase this year with the additional organic acreage in the state. Green Mountain Feeds gets the majority of their corn and soy tonnage from Nebraska and their small grains from Canada and New York. With trucking costs, it is cheaper to buy grain by rail out of Nebraska than it is to buy grain closer by in Western New York.
Volume of Imported Grain
None of those interviewed had a strong sense of the volume of grain imported for domestic livestock, though they all try very hard to source their grain from the North American Continent and if they have to reach further, they will turn to South America. Clarkson Grains imports about 10% of their grains from Argentina and used to import from China, but hasn’t for 2 years. There is always a concern about the integrity of the imported grains as there are not enough inspections in place to make sure that the USDA NOP standards are being met. It was also explained that there are plenty of large livestock operations and other entities that purchase large quantities of grain and they will purchase imported grains if the price is right.
If the imported grains were to start driving down the price of domestic grains, then we would be hearing a much larger outcry about their use. This could happen sooner that we think, as it is cheaper to freight grains to US coasts than it is to transport grains by rail car to the concentrated populations on the East and West coasts.
What if we see a 10% increase in demand for grain?
If demand for organic grain was to increase by 10%, its effect on the current prices would be dependent on who was looking for the grain; small individual dairy operations or large operations such as a poultry farm or one of the large scale dairies. Large outfits will most likely import grains directly, and that won’t affect the demand for local grains, but greater purchasing from small family farm operations would increase the need for domestic grains. Others felt there Just isn’t room for a 10% increase; the grain is not there and probably wouldn’t be there internationally either. The organic grain market just does not ramp up that quickly.
Farming in Equilibrium
There are some producers who are not feeling the pinch like others; they are the producers who grow their own forages and grains and rely very little (if at all) on purchased feed. Darlene and Dan Coehoorn would be one such example. Of the 550 acres that they crop, less than 200 of that acreage is needed to feed their herd of 55 cows. The remaining acreage is used to grow canning crops, human feed, and livestock feed. Even in this situation the Coehoorns have reduced the amount of grain that they feed their cows. It does not make sense to feed their cows much grain at such a high price; the return is just not there. With corn and wheat, it is more cost-effective to sell it as feed rather than use it, though Darlene was quick to point out that they continue to feed a certain amount of grain to maintain body condition and to make sure they don’t damage the lactation of their cows. Increasingly organic producers are looking to build relationships with their neighbors to start building their own local supply by forward contracting. One such producer is Paul Tillotson from New York who has started to work with neighbors to ensure their long-term supply of feed. Alternatively some organic dairies, like Arden Landis, are maximizing their ability to graze pasture at peak production times and drying their cows off to minimize winter feeding and work.
Will an economic alignment of prices happen with the increased worldwide demand for conventional grain and the current energy policies of the US? Conventional prices for milk and beef are projected to remain high until the fall of 2009 so it’s reasonable to project that grain and forage prices will not level out until the fall of 2009. Organic Valley is working with corn farmers to put together a farmer pool to produce corn for sale to OV livestock farmers, principally dairy and poultry, but Darlene Coehoorn has her concerns as to whether or not that can work. As a grower wanting a parity price for her grains and as a dairy producer wanting a reasonable price for her milk (at this point at 50% parity in WI), she feels that the grower pool is counter productive to both sides.
What she wants to see is an increased pay price for the milk so that organic dairy producers can continue to operate the dairy portion of their farm. It is good that the grain producers have achieved parity for their grains – it is a long time coming - and we should not try to drive their price down just when they are getting a fair price.
As a result of the high feed and energy prices, we will see producers changing their production practices and increase their use of grazing and high forage diets for ruminant livestock. Most producers will take 2-3 years to build the fertility, productivity and their production knowledge to replace purchasing grain and forage. Klaas Martin projects that we will also see a more local and regional infrastructure for grain and forages develop. “Farmers [in general] will need to become more innovative and self-reliant and will turn to the pioneering spirit of organic dairy producers”, says Klaas. He feels that organic dairy and crop farmers could be setting an example and need to reach out to others in their community as they make adjustments in these rapidly changing times. Others aren’t quite so positive that organic dairy producers will be able to survive long enough to make those changes unless there is an immediate increase in pay price followed by regular increases that will allow them the time and resources to make the significant changes in their production practices. While some are, again, calling this “a perfect storm” of circumstances that will not be replicated, we have had three years of “perfect storms” that have seen organic dairy producers losing profitability. It is time to look at organic dairy and work together to devise a systems approach to compensating all levels of the industry.