As some might recall, I follow coffee pretty closely. And while coffee trading may be a relatively closed shop, the price still responds to supply and demand. I recall from my econ class that even monopolies have to factor in the reduction in demand consequent to an increase in price unless the good is inelastic. That's four decades old, though, so maybe my recollection is off.
Here's the thing: oil's dropping as the supplies bulge and the dollar strengthens. Gold's weak as well. That fits a deflationary environment. Increasing interest rates fits an inflationary one. Coffee remains weak, trolling multi-year lows. What's intriguing to me about this is that evidence continues to grow that the el Nino taking place is getting stronger, and there's now discussion of whether this year's even might be stronger that the record one in 97-98. El Ninos generally mean the coffee crop is smaller than average. So while weather developments suggest a reduction in supply, pricing suggests a marked decline in demand, too. Either that or deflation with a stronger dollar.
Maybe I'm missing something here. (I probably am.) Anyone care to help me understand this better?
Procter & Gamble, Starbucks, Sara Lee, Kraft, Tchibo and Nestlè control 60% of the market. Actually they are in overproduction, 120 million bags (sixty pounds) of coffee products, 105 consumed. The inventories accumulates from year to year.
They are trying to introduce into the market a GMO coffee variety whose seeds ripen all at the same time, greatly cutting production costs and collection costs, allowing automatation. They are destroying the lives of 125 million people, mostly small-scale farmers and their families for profit in exchange for a coffee built in the laboratory.
Andrew Goodwin writes:
Has anyone else made the same observation that nearly without fail, the same people who make the sternest warnings about climate change are the same ones who mostly firmly protest GMO food?
If the climate is changing then please explain why the crops that worked in the old climate will succeed in the new one. Sometimes it is enough to make me think these folks are going to succeed in starving us all.
In this case, respectfully, it seems that some parties would rather see higher coffee prices, which they think will help some number of people. They don't consider that the destruction of the Brazilian rainforest to make room for coffee plantations, profitable only with prices at higher levels, might have catastrophic impact on humanity in the longer term.
Michael Ott writes:
I've noticed that those that are vocal about climate change tend to make arguments based on the overwhelming scientific evidence. Yet when pressed with overwhelming evidence about the safety and benefits of GMOs they ignore it or claim it's a conspiracy. They make fun of those who ignore climate change science or claim it's a conspiracy. It's all hypocritical. This article was thought provoking: "Unhealthy Fixation: the war against genetically modified organisms is full of fearmongering, errors, and fraud. Labeling them will not make you safer."
Jim Sogi writes:
The Kona Coffee specialty crop will be big this year. There are a lot of beans and just starting to ripen. We had some big rains right at the beginning of the season and there were rows of fragrant coffee flowers early on. The coffee borer was bad last year, but as with many natural cycles, it is not as bad this year. With the trees stronger from good rain, the pests can't get as big a foot hold. There is not enough Kona Coffee to make even a drop in the world wide market, but it's what I grow, harvest, process, dry, roast, grind and drink. There's not many coffee gourmets who can say that.
My son got me a nice Rancilio grinder. It's made a huge difference and now I enjoy real Italian style espresso and cappucinos. It's a game changer compared to the cheapo grinders and results in a very even fine fine grind which you can't get any other way.
Stef Estebiza writes:
There is a ton of material about the problems with GMOs, and not only with the way in which they are then treated with pesticides. The list is long, but lobbyists' interests are mor profitable and important than your health. Here are two articles:
Michael Ott replies:
Those articles are perfect examples of unfounded claims. This quote is just false: "because they are heavily contaminated with the toxic herbicide, Roundup". Literally dozens to hundreds of tests have been performed and prove the opposite.
False: "petunia plant which is a nightshade. That means folks with nightshade-induced arthritis can now get arthritis from soybean products." This has never been shown in a valid scientific study. Rather it's been repeated by pseudoscientists from a base false claim.
The second article showed results based on massive unrealistic doses and has been widely discredited.
My sons Quincy and Ryan are 11 & 8, respectively. They spend a massive amount of time together and are best friends.
They love to make up games, challenges and bets. I strongly encourage this.
Tonight at dinner we had a smorgasbord of leftovers from the weekend. Ryan got a devilish grin and held up two closed fists. Here is a summary of the conversation:
R: Quincy, I bet you can't tell me how many apple slices I have left
Q: What do I win?
R: The winner gets to shower last (Who goes first and last in the shower has become a big deal)
Q: Ok. I see one apple slice on your plate. I think you hid one in your noodles. And I bet you only have one in your hands. You want me to think you have one in each hand and there are 4. I bet there you only have 3 left.
R: I only have one! (Opens two empty hands and beams with pride). I wanted to see if I could fool you and give you the answer but make you guess wrong.
The whole scene reminded me of the iocane scene from The Princess Bride .
A strangely proud dad,
How many market lessons can you find in this article? Fantastic article.
"A Pickpocket's Tale: The Spectacular Thefts of Apollo Robbins " by Adam Green
Michael Ott adds:
Here's a link to the video that accompanies the piece. You can see him in action and it's fantastic.
This is a funny essay about Jeremy Lin from actor Jesse Eisenberg:
When I was twelve years old, I decided it would be cool to wear all green to school—green sweatpants, green shirt, green socks, even green shoes! Sadly, the other kids in my class didn’t think it was such a great idea. I was taunted on the playground and called names like Green Bean, Kermit the Frog and Snot Body.
Bullies chased me through the gym hurling rocks and insults when a young Taiwanese-American boy stepped in between me and my attackers. It was little Jeremy Lin, who was four years younger but in my class because he skipped several years of elementary school. He chased the bullies away and shouted after them, “Pick on someone your own size!” Then, just to cheer me, Jeremy scooped up the rocks and slam dunked them into the basketball hoop. No one ever picked on me again.
It may sound extraordinary. But that was just Jeremy.
The story gets better from there.
In talking with the web mistress about checkers versus chess, I told her I am not convinced at all that the road to Italy is open for Lubo. She said that it's probable that if he's that good at checkers he must be very good at other things. I said that I know a lot of chess players that are very good at chess, but not very good at much else. Then I said I think that checkers has more applicability to life than chess because it's a binary game with up and down forward or back, but chess is a war game with a special board and moves. I believe that the logic of checkers has more applicability and to be good at checkers has more generality. I am not convinced by my argument but many wonderful things can come from simple on and off, high or low, 1 or 0 as computers and circuits show.
Anatoly Veltman writes:
I always tell a story about my adolescence, where I was groomed to become a Soviet Checkers Champion ever since introduction to the game at the age of 5.
Among customized tutorials by special instructors of the KGB fame: lessons on peripheral vision (when moving up from 64-square national game to the 100-square international game) and on how to forget things (when you blank out a totally missed move, to allow complete focus on task currently at hand). And yes, to most professional players that checkerboard was a model of life — very hard to explain to a non-pro.
I think, one of distinctions that the Chair is after has to do with "obligatory jumping" in checkers vs. no such thing in chess. This rule leads to more logic and structure in checkers, while allowing more improvisation and artistry in chess.
Michael Ott writes:
I was recently talking with a friend about the differences in Western vs Asian mindsets. He remarked that it may have something to do with chess vs. Go. In chess, you need to totally dominate the opponent, knocking out many pieces and eventually capturing the king. In Go, you can be behind until the last few pieces are played and still come through to win 34-30. His declaration was that Go players are comfortable with a tight game if they have an exit strategy. They are comfortable with a victory, even though it may be by a small margin. Chess players, on the other hand, tend to go for the kill and the big victory.
There are obvious exceptions, but I thought it was valuable to share.
Don Chu writes:
I wrote this a fair while back, commenting on an old DS post, Chess Gestalt:
But GM Davies is of course right about how relative game complexity has everything to do with board size, and less about the relative merits or the fuzzy ‘rhetoric’ (word used in its modern pejorative usage, not the ancient noble art) of hemispheric mindsets.
This is one of my all time favorite news stories.
Relatedly, a friend of mine was at a karaoke bar in CA and a dirty blonde white guy was hogging the stage. He was terrible and people started booing. Then he sang a few Tom Petty songs and the crowd turned around. That's because it was Tom Petty.
This is another example , with Jewel, but staged.
Jim Sogi comments:
The question is not, "Do people recognize genius" here. What is being tested is "Do people, know, care about classical music?" Lets say they posted some brilliant computer code. Surely no one would recognize the genius therein. Let's say Bob Dylan stood with his guitar outside Alice Tully theatre. Most theater goers might ignore him and the screeching music, assuming they did not recognize his face.
• World population will grow 2.3 billion by 2050, to over 9 billion
• Nearly all this growth will come in developing countries
• This population growth will require a 70% increase in global food production
• In developing countries, production will need to nearly double
• Making this happen will require annual investment averaging $209 billion.
Jeff Watson writes:
With our productivity in agriculture, the population increase will be great for our exports and great for business. With science being applied to agriculture, yields/acre have been steadily increasing for the past 300 years. There's no need to think we've hit the maximum in production either. 40 years ago, Erlich, in The Population Bomb sounded alarms about the population doubling by 2010 and he laid out a doomsday scenario. We're here and none of Erlich's predictions have been realized.
Michael Ott writes:
Jeff makes great points. Additionally, yields for commodity crops are surging and seed companies are investing in growing crops in suboptimal soil.
This year's decline in yields is an aberration due to late season flooding. Farmers that I have talked to are getting 190-200 bushels of corn per acre or 120 if they were flooded. It's netting out to an average of 168 or so with a leptokurtotic distribution. I expect next year to average 180+, given reasonable weather. Combined with new crops designed to grow in arid and sandy soil, we should be swimming in excess.
Seed companies are scrambling to find uses for extra corn, so famine and starvation not an issue for those who are actually paid to grow the food.
George Zachar writes:
Alternatively wealth is caused by (low) birthrate.
Kim Zussman comments:
GZ's excellent link sheds light on a prior study sent to the list, showing high positive correlation between national per capita GDP and distance from the equator ( abs (latitude) ). Fertility rate is generally higher in countries closer to the equator, which on average are poorer.
1. It is warmer and women wear less
2. There is little work and more idle time
3. Indoors + outdoors vs just indoors
4. Mountain movement necessitates more Mohammeds
Once upon a time these were called "truck gardens", and they were exactly that– local gardens whose produce could easily be trucked to market without refrigeration. Not surprisingly, the first efforts of the Dept. of Agriculture during the Depression were to limit sales of local produce for "health" reasons. The larger grower co-ops were finding themselves undercut by truck gardeners, and the economists in both the Hoover and Roosevelt administrations had "proven" that the solution to the Depression was to raise the price level. Then, as now, open competition was great for the customers and painful to the producers. Then, as now, the votes in Congress went with the large producers and the civil servants, who were, as always, certain of the marginal utility (for them and the public interest) to be found in government's unhidden hand.
Michael Ott wites:
FYI, if you ever need anything to plant in your backyard garden, check out seedsavers. It's the largest non-government seed bank in the US and they have amazing varieties of nearly every plant that you've ever heard of. Their business is booming because they were into the organic local movement before it became hip.
Full disclosure– Seed Savers was founded by my cousin and she is still on the board. If you're ever close by, it's a fantastic and relaxing way to spend an afternoon.
Here's a great article on how the carry of around $1.00 in July 2011 CBOT wheat could cause farmers and elevators to store more wheat, affecting [storage capacity for] corn and beans when the harvest comes in and a possible resulting glut.
Jeff Watson, surfer, speculator, poker player and art connoisseur, blogs as MOTU.
Michael Ott writes:
Do you have any idea of the amounts of wheat involved? I ask because of all the farmers I know, just one has planted wheat and will hold on to it. Therefore, is this going to be widespread enough to have an impact on markets? Or is it a small factor that won't matter much, given the massive volumes of commodities involved?Granted, I'm in Iowa, which isn't exactly wheat country, so my sample might not be representative.
What is a good telephone conference service for workgroups of 3-4 individuals to conference. Call-in required OK. — A Reader.
I've always had clear lines and easy service from www.freeconferencecall.com. I have my own number and can host a call at any time for free. Very easy setup and they send you a summary after the call of who was on and for how long.
Don't understand their business model, because as the name implies, it's free. You don't need to go to the website, so there's no ads to view and as far as I can tell, they haven't sold my info to spammers. Nevertheless, it's a great service.
Mr. Albert adds:
I'd second this site. Used it through four years of B-School. Never had a problem, and never heard of one through classmates.
Kevin Redart explains:
Their business model is to generate long distance fees for interexchange carriers who pay a portion of their fees to local networks to compensate for use of their networks. They receive a small fee from local networks for generating traffic. Also, they offer toll-free conference for six cents per minute per caller. They are undoubtedly getting a piece of that upsell.
As to the hydrogen production issue, doesn't it shift our reliance to coal, instead of oil? Yes, its domestically sourced, but also beset with similar (worse?) carbon emission issues as petroleum…
Michael Ott replies:
Hydrogen can be produced from coal, but it's very nasty to the environment and will eventually run out. Biomass is a much better source because it's renewable and available in massive amounts (1.3 billion tons per year, according to the USDA). Biomass can be converted into both liquid and gaseous fuels and will be the bridge to the hydrogen economy. This is why funding ethanol research is important. First you make it from something easy, like starch found in corn or sugar cane. Then you make it from something available in much larger amounts like wood, corn stover, or other ag residues.
One of the main advantages of making ethanol from corn is that the logistics for storage and transport are well established. Plus there is a lot of sugar which can be easily accessed by existing enzymes. The logistics of moving around large amounts of biomass are not well known and will require large amounts of infrastructure. It will be built because infrastructure is always built to support a better and cheaper fuel source. Cellulosic enzymes are also getting better, improving 30X in the last 5 years. The same infrastructure will be used for gasification of biomass, which will produce the massive amounts of hydrogen needed to drive an economy.
This is why I'm optimistic about biomass. Currently, you can make about 80 gallons of ethanol/ton, so the potential productivity is 104 billion gallons. The US consumed 142 billion gallons of gasoline last year, so there is potential to replace a significant chunk of gasoline. Assume that efficiencies will increase to 100 gallons/ton and that dedicated energy crops provide 1.5-2 billion tons/yr, and theoretically all gasoline could be replaced. Obviously not all will be converted, but the potential is there.
Addressing Stefan's points about energy efficiency — Assuming that the sun's energy is free (which it is because it will shine the same on a parking lot as a cornfield), the efficiency of ethanol is 1.4 : 1. Gasoline is 0.88 : 1. The economic efficiencies are much more important. Right now ethanol is much cheaper to produce than gasoline and will be competitive down to $40-50/bbl oil. Both ethanol and gasoline are heavily subsidized, so economic arguments are tough to make. If all subsidies and credits were removed, ethanol and oil would be roughly equally priced at $30/bbl (maybe a little higher due to recently raised corn and nat. gas prices).
Today would have been Louis L'Amour's 100th birthday. I started reading his books on the advice of Vic and Laurel, and highly recommend them. The Sackett series is best, but Hondo is wonderful as well. There are many lessons for a lifetime in each book, so grab a couple from a bookstore or your local library and give them a read over the Easter weekend.
March 10, 2008
Rove taunted at University of Iowa
(CNN) — Former top Bush aide Karl Rove didn't get the friendliest of receptions at the University of Iowa Sunday, CNN affiliate KCRG reports.
Rove, who was paid $40,000 to speak at the University, was confronted with an at-times hostile crowd of 1,000, and was interrupted on several occasions.
I was there. The crowd was fairly evenly split, but those that hated him were much louder. The first 10 minutes were wasted with jeers from the crowd and idiots who planned to cause a ruckus until they were removed. I lost two bets: First, that someone would get tasered. Second, that we would hear the line "Don't tase me, bro!"
After we got started, the journalism prof/interviewer tried to trick Rove into admitting errors, but he was hopelessly outmatched. Rove is really smart, surprisingly articulate and fairly funny. When asked a serious question, he would give multiple examples of why his response was correct, backed by a serious dose of logic. I didn't always agree with his conclusions, but they were definitely well thought out.
When asked ridiculous things, Rove would usually point out the flaws in the question. One question asked about Bush's tenuous relations with the press and Rove's assertion that news was driven by commercial interests. The implication was that journalists are not driven by capitalism, rather by reporting on appropriate stories. Rove responded by saying that we don't have a state run media here, that all reporters work for companies who pay their salaries by selling subscriptions and advertising. They are incented to get as many viewers as possible and will do what is needed to acquire those viewers. Therefore, Rove said, the foundation of the question is untrue and he didn't need to answer the larger part.
The best line of the night came in response to a question about Bush's lying about the war. Rove said he'd like to read a quote from the President of the United States. The quote was about how Saddam had WMDs and we needed to disarm him. Then he read a similar quote from the VP, and the Secretary of State. The crowd hooted and hollered during the whole thing, jeering the lies that Rove was reading. Then Rove said these quotes were collected in 1998, and came from Clinton, Gore and Albright. It was pretty funny.
I attended a talk by a few Iowa State University professors today. Every winter they travel the state talking about climate, crop, livestock and ag issues to a diverse audience. Here are some notes.
For the last 800 years, there has been a drought every 18-20 years. We haven't had a major drought in the Midwest since 1988 and several indicators mimic 1987-88 conditions. A very smart climatologist with a proven track record stated there is a 70% chance of below average crop performance due to weather. If we escape a drought this year and next year, it will break a cycle that has held for 800 years, so the odds favor a drought soon. Current predictions call for a wet spring, which could hamper planting, and then a bone-dry summer, which could hurt yields. This isn't good for farmers, but could drive prices higher.
New genetics traits and water management techniques can help mitigate a drought somewhat, perhaps leading to 10-20% decreases in productivity, rather than 30-40% decreases that have been seen in past years. Therefore, farmers are likely to apply for higher levels of crop insurance, and those premiums are likely to be paid out in the near term. Insurers may take a hit after a few years of good returns because we've been mostly disaster-free.
Demand for corn is high and it will continue to be planted in a large number of acres. Traditionally, farmers have planted corn and soybeans 1-1. That ratio has shifted to 2-1 and will likely stay that way for a few years. Bean prices are high, but they aren't high enough to sway farmers into planting more soybeans. Therefore I predict bean prices will rise into planting season, similar to the rise in corn prices last winter/spring.
Lower wheat, cotton and soybean carryover stocks will lead to higher prices in an attempt to buy acres, but will be unsuccessful. Farmers that do plant and get a decent crop will do well.
Several large index funds have deployed managers to the state, and I'm hearing that they are buying commodities as a hedge against inflation and to benefit from a presumed rise in the dollar by harvest time. South American soybean producers should produce well this year but be harmed by selling their commodities in weak dollars (they harvest in a few months, not in time to benefit from a rise in the dollar). Australian wheat should be much better after a disastrous drought last year.
The takeaway was that demand for commodities is going up for a number of reasons: biofuels, increased global consumption, etc. Supply could be harmed by a potential Midwest drought combined with already low stocks of key commodities. Prices of commodities, producers and processors are high and likely to go higher. This will be passed to the consumer and cause inflation in 6-12 months. Food has become relatively cheap over the last 40 years, perhaps even irrationally so due to a wide range of government programs and historically cheap energy. Now that energy prices and commodity prices are going up in conjunction, food will become much more expensive relative to income.
January 2, 2008 | 15 Comments
I have had many blessings in my life to learn and grow. One area that I've been exposed to since I bought my farm in 1999 is the economics of farming. What I've learned over the years, I've learned through osmosis, simply paying attention to what was going on around me.
Recently, the young man who owns the farm north of me approached me about helping him farm his own land. They've been renting it out (to another farmer) for nine years, and now he wants to farm it himself and make some extra money now that he is entering manhood.
There are several reasons that he needs my help. He can't read. He's illiterate. You'd be surprised how difficult something can be when you don't know the "code" (the written word). There's no one else to help him. He's been beaten down (psychologically) his whole life and now he's 21 years old and trapped on a farm out in the middle of nowhere. He can't even go anywhere because he can't get a driver's license because he can't read and no one will help him study for it. So one of the first things we'll undertake is that I'll help him get his drivers license.
But let's get back to farming….
This young man and I have spent a lot of time together over the years and this past week was no exception. We've been driving around going to local farm coops, the local FSA office, local banks, and to talk to other farmers, gathering data and information so that I can help him to become a farmer.
Here's what I've found out about corn.
There are many types of seed corn that you can use. Prices range from as little as $45/bag to over $300/bag. The huge difference in price is in how the corn has been genetically altered. The more expensive the seed, the more things it is immune too, as well as being resistant to many various types of herbicides.
We settled on a seed corn that cost around $115/bag. Quite a bit more expensive than the $45/bag seed. But actually, if you want to grow a real crop with the $45/bag corn, you'd have to spend so much money on different sprays that the price differential isn't much.
Each bag will plant about three acres of land, assuming 38" rows.
Here's what you have to do:
In March, you disk the ground smooth — assuming you didn't do it in the fall, which is actually a good thing to do, allowing the snow and moisture to break down the soil and the water to seep into the soil.
You then spread fertilizer. In this area, on this type of soil, a good mixture is 18-46-60 (N-P-K). This will cost around $44/acre.
Next, you spread anhydrous over the land at a rate of about 120 lb/acre. This runs around $0.41/acre for the anhydrous and $0.01/acre rent for the tool bar, for a grand total of $0.42/lb which works out to be $50.40/acre.
Then, when the soil temperature exceeds 50 F, you will plant the corn. This is usually done in the second week of April or later. When you've planted your corn, you now need to spray. You'll do a run of Atrozine spray mixed with cutworm spray. This will cost around $14/acre.
Here is where speculation really begins. If you plant too early, you're taking a chance on having your corn come up and then getting hit with a late frost, possibly killing it. So maybe it's better to wait to plant. But there are problems with that too. If you wait, then the spring rains come and you can't plant because the fields are too wet, and by the time they dry, it's possibly so late that your corn will be doing its main growing during the dry season and won't get enough rain during its crucial "tassling" stage — when the corn is tassling, it is absolutely crucial that it gets water.
Of course, these spring rains hold problems for the farmer who got his crop in early and didn't get hit with the frost. You see, in the spring, rain has a tendency to come in large amounts and all at once. It is not uncommon to see rainfall levels of 5+ inches in a week, sometimes in only a few days. Just as not enough rain can cause problems, too much rain causes problems.
In the bottoms, where the land is the most fertile, moisture gathers. The creeks fill up and sometimes spill over the banks. The higher ground drains all its moisture onto the bottoms, too. This causes water to accumulate in the bottoms. And in these areas of accumulation (large puddles or overly wet muddy areas) the crops won't grow.
So you not only have to beat the frost, you have to beat the rains and then the dry season. If this ain't speculation, I don't know what is!
But let's assume that you got your crop in succesfully. What you have to do now is check on your fields at least once a week to make sure that everything is going well.
In our area, we have problems with grasses and broadleafs, especially fescue grass. I'm pretty certain that cockroaches and fescue are the only things that really would survive a nuclear explosion. So the farmer will have to spray again, this time with Post, which runs around $6.50/acre. But if there's a break of fescue, the farmer will have spray Round-up again, which will cost another $25/acre.
So if you add all this up and figure in all the different things that could happen, here's what you come up with.
$38/acre for seed (figuring in a few different "extra things")
$94/acre for N-P-K and Anhydrous
$20/acre for spray
For a grand total of $152/acre just to put a crop in. The farmer in question has 133 acres of bottoms. So it will cost him $20,000 just to put the crop in.
Now, keep in mind that we haven't even added in the cost of fuel, which is quite substantial. Our best estimate is that it will cost around $5,000/year for fuel to put the crop in, take the crop out, and deliver it to market. So the cost for 133 acres is $25,000.
Now, keep in mind that it also costs you around $25/acre to spread lime on the ground — but you have to do that only every 3 - 4 years on aveage). But I think we've got enough "fat" built into the expenses above to safely assume that lime will fit in these numbers.
If you think we're done now, you are mistaken. What's missing? Does the farmer need to hire some help? Possibly on a small spread like this the son and father working together may be able to do it themselves. But they may need to hire some help. You see, when it comes time to sow or harvest, there is a very limited window to get things done. What if the fields are wet for a week, then dry out, but a heavy rain is forecast in two days? You may have to hire some help to get the crop out in such a short period. So you need to account for some possible cost for hiring some help.
What about bad things happening? You need crop insurance, too. Sure you can go solo and hope for the best — but, losses hurt you more than gains help you! This is especially true of farming. You're better off insuring your crop and giving up some profit so that you can ensure that you don't get wiped out. Frost, hail, disease and pests can wipe you out. It's always best to give away a portion of your profit to ensure that you don't get wiped out.
Further, we have to take into consideration the cost of equipment and the cost of repairs on that equipment. Farm equipment is really expensive, but luckily, my friend has most of the equipment already. But, unfortunately, it's old and will need a lot of repairs. You simply can't believe how things break on a farm. Farming is really, really hard on equipment.
As an aside, when I was planting my own foodplots, I would spend 3 hours repairing equipment for every 1 hour actually spent sowing. That's on the high side, but you get the idea.
Now, on top of all of this, the speculating farmer has to further speculate with grain prices in the futures market.
Right now, in my area (as of last week) corn futures were trading for $4.10/bushel at the local grain elevator. The elevator operator even told us his spread on the deal (I don't know if that is normal or not). He's selling the contracts for $4.60/bushel on the exchange and buying from his farmer clients for $4.10. I simply don't know enough about grain futures (especially at ground level) to know if this is a good deal or not, but my gut tells me that that's a pretty high vig to pay.
So let's say for the sake of discussion that paying help, insurance and repairs is going to run this farmer an additional $5,000/year. A grand total of $30,000 to plant 133 acres in corn, or just under $226/acre.
Now, lets look on the profit side of things.
First, to just break even, assuming that he gets $4.10/bushel, he'll need to bring to market just over 55 bushels/acre. Believe it or not, that's not to hard to do.
Realistically, this farmer expects to get around 125 bushels/acre on average. Now, note the phrase "on average". Some years, he'll get far less than that. We just had a bad year on my farm this year. My bottom land is right next to his, so our bottoms are basically the same, and we got 80 bushels/acre off my place. So it's fair to say that he'll end up with an average annual range of 80 - 150 bushels/acre.
At 125 bushels/acre, and assuming he'll get $4.10/bushel (of course, we have no idea what grain prices are gonna be in the future), he'll gross around $68,000, which will net him out a profit of $38,000 for 133 acres. Not too bad!
But if we look at the ranges of 80 - 150 bushels/acre, we find that he could get as low as $14,000 in profit to as high as $52,000. That may not seem too bad, except when you take into consideration that he could easily get $100 - $150/acre rent for that bottom land, thus guaranteeing a profit of $13,00 - $20,000/year.
Also, most farm land has some sort of government subsidy attached to it. The person who actually does the farming is the one who gets the subsidy. This amounts to around $10 - $25 acre (more or less depending on the land and circumstances).
And keep in mind that in order to get that guaranteed profit (by renting his land), the farmer has to do absolutely no work whatsoever. So, on the margin, his true profit (profit from work - profit from no work) is much less, since by renting out their land and taking the risk free profit, he could free himself up for other, potenitially, more profitable endeavours.
Why would anyone want to rent the land? Farmers who rent a lot of land usually own a lot of big time equipment and farm a lot of land. Their profit margins are smaller, but they make up for it on volume.
But in the case of my neighbor, he sees this as an opportunity to make more money and springboard himself to bigger and better things.
Now, it may look like being a farmer can be very profitable. Well, it could be. If you're saavy and understand the land, you can make a good profit. But it doesn't matter how good you are, if the weather goes against you.
Plus, since grain prices have gone so high so quickly, you may be thinking that there's a lot of profit potential. There is, except that the other costs of everything listed above are going up proportionally, such that the profits available to the farmer are not really growing that much. Actually, the farmer makes a higher profit when grain prices go up quickly (assuming he can sell some contracts) but the providers (of seed, fertilizer, lime, equipment, etc) haven't yet raised their prices. And make no mistake about it, the providers are raising prices to soak up the extra profit now available from increased grain prices.
Times like this (fast rising grain prices) are great opportunities for farmers. However, there is a much darker flip side to that coin. What happens when grain prices go up real fast, then providers raise their prices, and then grain prices go down fast? That is disaster for a farmer.
Now, if all that weren't enough for the farmer to live through, he still has to become an actual speculator, out in the futures market.
You see, $4.10/bushel is a great price for corn, but the farmer can't sell his entire crop since he doesn't know how many bushels of corn he'll actually produce. So he'll sell some of his crop now, and some later. Many farmers sell 25% - 30% of their average crop (which is around 125 bushels) as long as it's no more than 1/2 of their low end worst crop (which is 80 bushels).
So to do this math, 80 bushels X 133 acres = 10,640 bushels of corn, and 125 bushels would be 16,625. So this farmer would sell no more than 25% of 16,625 (4,156 bushels) but would do no more than 5,320 bushels (50% of the 10,649).
Now, future contracts are sold in 1,000 bushel increments. So this farmer would sell either 4,000 or 5,000 bushels at this contract level. So let's say he sells 5,000 bushels at $4.10/bushel. He has locked in $20,500 of revenue, assuming he can deliver.
As the season progresses and he gets a better feel for how his crop is faring, he may decide it's prudent to sell more contracts. Hopefully the price will have gone up, but you simply don't know.
You see, if he's having a good season and growing a good crop, that means the supply of grain will be good…..and the price will usually go down, so the contract prices will go down too. If he's having a bad or off year, the supply of grain will be less and the prices will be higher, but he'll have less crop to sell.
A good scenario is for our farmer to have a good year while other farmers are having a bad year (because things like drought can be very regionalized). However, a bad year is just the opposite — our farmer has a bad year (say a regional drought) while other area's are doing great!
Of course, the goal is to have your first contract be the least profitable contract you sell all year while having a banner year! But hey, isn't a scenario like that the dream of every speculator!
D. J. Kadrmas remarks:
Anything is better than listening to a boss, even gambling on the weather. Some small farmers have outside jobs, but I notice they usually quit them quickly. The wives, now, that is a little different.
Alan Millhone writes:
In Ohio around Columbus there are currently 50 gas stations that offer E-85 alternative fuel (if your vehicle can use it) at 30-40 cents less per gallon than conventional fuel and it is helping the environment. In the summer in my area we look forward to having fresh picked corn on the cob from from Reedsville, Ohio, along the Ohio River. If the E-85 takes hold the big boys will buy up all the locally grown corn for this fuel.
Michael Ott explains:
This is a common mistake. Corn on the cob is sweet corn. Corn made from ethanol is field corn. They are not the same thing, and the price of one has little to do with the other. Sweet corn is much more expensive than field corn because it is sold in smaller units to mostly retail customers. Field corn is sold in massive quantities to industrial producers, like many other commodities. A farmer gets a much greater return on sweet corn, but the market is much smaller and usually local.
Scott Brooks adds:
The article I wrote is about what Mike refers to as "field corn". In my area we call it "feed corn." Sorry for not being more specific about that. Most of the field/feed corn in my area is used for animal feed. Unlike delicious sweet corn, feed corn is definitely not very tasty, no matter how much butter, salt or pepper you put on it.
Also, keep in mind that the economics of growing and selling corn that I presented pertain to my area, northwest Missouri. The economics are different in other areas. For instance, whereas we expect to average around 125 - 150 bushels/acre, certain areas of Iowa can average 250 bushels/acre. I don't know what the input cost are to sow/harvest corn are in Iowa.
My wife and I both noticed an amazing proliferation of John Edwards signs while driving through Iowa for our many Christmas celebrations. He has far more signs up in yards than Hillary. Obama has more and bigger office decorations than anyone else on the Dem. side. Perhaps this means Edwards is making a run with the general public, but pro-biz Dems like Obama? I could see how that would be true, because my take on Edwards' recent statements is that personal responsibility will end with his administration. We can just count on the government for everything.
On the Rep. side, there are several big nice Romney signs at big nice houses. There are also lots of small Paul signs around the U. of Iowa campus. Huckabee signs are becoming much prevalent, especially in rural areas and on country roads. I can't recall seeing anything for Giuliani or McCain.
Based on yard signs, I'm predicting Edwards and Obama in a close 1-2 finish with Hillary a distant third. Huckabee will squeak by Romney with Paul having a small but vocal third place finish. We'll see how things turn out on Jan 3.
December 13, 2007 | Leave a Comment
Ninja Warrior, a Japanese television show, was playing incessantly on one of the cable channels when we were in the Caribbean a couple of weeks ago. Great fun for both kids & adults. Contenders (some of them real athletes, Olympians & etc.) try to scramble across an obstacle course without falling into the moat below, while a breathless hysterical announcer (whose comments are printed as subtitles, in a sort of ESL English) encourages and heckles them. To get the flavor, run the "Top 5 Wipeouts" clip on the site.
Michael Ott adds:
My favorite show along that vein is Most Extreme Elimination Challenge (MXC), which airs on Spike TV. It's an old Japanese show that has been re-dubbed by comedians who make fun of the participants. They come up with hilarious names and preposterous occupations while the contestants do ridiculous stunts. It's a fun way to waste half an hour. My favorite contestant name is Mahatma Running Bear, who is half Indian and half Indian.
B!ll Cl!nton popped his head into a meeting with my wife last week. He was in town campaigning for H!llary and had some extra time, so he walked around downtown Iowa City. He popped into a coffee shop and there were a few library employees in there. They told B!ll to come to the library for a tour. Jennie, whose job is to set up job shadows for high school students, needed a room to host a big gathering. I'm a board member at the library, so I got her a room there. B!ll wondered why a bunch of high school students weren't in school, so he stuck his head in. Jennie swooned and ended up talking to him for about 15 minutes. She said the first five were uncomfortable because she was so nervous that she couldn't speak, so he just rambled about the architecture at his Presidential Library. She had her camera in her pocket, but was so rattled that she forgot to get a pic. She had always been a fan of his, and after meeting him in person she said that she understands exactly how he attracts the ladies. Apparently the guy just has "it"!
Barry Gitarts adds:
A few months ago I was sitting in the reception at a midtown law firm which had a photo album on the table of B!ll Cl!nton with the principals of the firm. A lady sitting across from me blurts out “I think he is the sexiest man alive!"
You can buy a car with a diesel engine and use vegetable oil . I heard some people are able to run a car on a 15% diesel / 85% vegetable oil mix. It is great if you live in the countryside. You can grow your own untaxed fuel.
George Zachar notices:
Decatur resident Dave Wetzel may be in hot cooking oil with the Illinois Department of Revenue, who claim he needs to pay $244 in back taxes for the gallons of vegetable oil he has been running his Volkswagon car on for the past 5 years.
Wetzel uses recycled vegetable oil, which he picks up weekly from an organization that uses it for frying food at its dining facility.
"They told me I am required to have a license and am obligated to pay a motor fuel tax," David Wetzel recalled. "Mr. May also told me the tax would be retroactive."
Michael Ott explains:
If you do make your own biodiesel from free used vegetable oil, the cost per gallon for materials is around $.60. if you pay someone minimum wage to do all the work, the cost is about $5 per gallon. Therefore if you enjoy the work and do it as a hobby, it's a good deal. It's not a money saver.
Some in the biofuels industry are against road taxes on their fuel, but I think they're necessary because infrastructure is already underfunded. Plus, once we're making a large share of the fuel in the country, it would be noticeable.
I just spent some time in Vancouver and took an afternoon to visit Wild Play. It was phenomenal and I highly recommend it to anyone looking for an adventure. The staff were extremely friendly and gave me rides to and from the ferry dropoff point.
I did the ziplines through the forest and over the river and had a blast. Then I moved on to TreeGo, which is an obstacle course up in the trees. It took about 90 minutes, going through numerous swinging ladders, rope nets, and shorter ziplines. You're always safely latched in but it doesn't feel that way.
One lesson for Specs comes from the swaying ladders. They are rope ladders laid out horizontally between trees that are 50 feet apart. If you are trepidatious and walk slowly, it is really hard to keep your balance and you have to depend on the safety line to hold you up. If you sprint and trust your balance, it's easy, fast and fun. Same thing with tremulous markets — if you trust what you're doing and rely on yourself, you can do it.
Riz Din adds:
A couple of months ago, I did some very similar tree swinging in the UK with a company called GoApe. I would recommend it to people of all ages.
If you do go, it's worth taking the time to get comfortable with the heights involved and with the idea that you are safely harnessed, so you can then do exactly as Dr Ott says and be aggressive and enjoy the day. Or you could challenge yourself by aiming never to rely on the harness as the course gets progressively more difficult. Or you can switch between modes from tree to tree. Either way, it's all good fun. Everyone walks away with a smile on his face and sleeps well after a day of physical activity in a natural environment.
A big problem with trading is that you don't know how reliable your harness is until you fall. Indeed, quite often we think we are latched in when we aren't. That said, I strongly feel that once we are comfortable and familiar with the riskiness of our approaches it is on us not to be shy when it comes to running the course.
As an explanation of everything, I liked How We Got Here by Andy Kessler, available free online. It covers the invention of nearly everything from the steam engine to the Internet and touches on issues dealing with patents and banking systems along the way. It's his best work and well worth reading. He inserts levity and explains things very well. I also liked Running Money and Wall Street Meat by the same author, but found his latest, The End of Medicine, worthless.
George Zachar writes:
Hans-Hermann Hoppe explains pretty much everything in his 33 page essay Banking, Nation States and International Politics, tying together gold, fiat currency, banking, the State, the evolution of the Euro….
I talked to my farmer the other day. We haven't gotten much rain this summer, and haven't gotten any on my farm in the almost the last month.
Corn doesn't do well when temperatures rise above 90. Really 94 is the demarcation line for corn. Above that temperature corn really begins to suffer and yield is adversely affected. It's been above 94 for sometime now, some days above 100. Couple that with no rain and problems are brewing.
Spot thundershowers have helped some areas but around my farm in northwest MO and southwest IA we're hurting.
When driving across the state on I-70 (which bisects MO from east to west) you see corn and beans that range from looking OK down to puny. It's a function of rain. If you were lucky enough to own land that caught some thundershower cells this summer, you're probably doing OK.
And my food plots are almost a complete bust this year, too. My warm season plots, which consist of corn, soybeans, sorghum, sudan grass, lablad, cow peas and other assorted items, are likely to be a complete loss this year. These plots are planted in areas that are not the greatest of soil (for regular crops) but are located in good places for wildlife access and hunting.
My cool season plots, which consist of various clovers, alfalfa, and legumes, are suffering too. The weeds are overcoming them but we can mow the weeds down. Clovers, alfalfa, etc. need more water than the weeds, so in drought situations the weeds have a huge advantage.
It could be an interesting year for grains. I wonder what opportunities the grain mavens see coming out of the Midwest?
Mike Ott replies:
Contrary to what Scott has seen, those of us in real corn country are expecting a barn buster. Crops look great in Iowa, and I've been all around checking things out. There is a notable difference as I go south, but everything north of us looks really good.
Cologne and cleaning agents: Russia's killer drinks. 12:16 15 June 2007, NewScientist.com news service; Roxanne Khamsi
A shocking 43% of deaths in working-age Russian men result from drinking alcohol not meant for human consumption, such as cologne and cleaning agents, according to a new study.
This morning I described Russia to my son as the Brooklyn of Europe: lots of smart people come from there, but it's not a good place to stay.
Mike Ott adds:
I recently spent some time in Ukraine trying to figure out the best way to help them build ethanol plants. A major roadblock was the fact that the output of the plant is a 'potent potable' and our hosts were concerned that people would try to drink it. I shrugged off the concern because, while 100% grain alcohol is not tasty, it can be consumed, but after denaturing with gasoline, it is nondrinkable.
I am aware of just one instance among all 199 of the US plants where an alcoholic employee was caught drinking the final product, and therefore thought this wouldn't be a concern. Perhaps I needed to better understand the locals to gauge this risk.
I played golf this weekend with my wife and a random twosome. On the first par 3, I hit a good shot about 6 feet away from the pin. The next guy hit it about 2 feet away. I congratulated him and told him this story:
My first hole-in-one happened just like this. I was playing with a friend and a random twosome. One of the other guys was very competitive, and he hit a shot about 5 feet away from the pin. He taunted me, saying, "Let's see you get inside that!" I calmly lined up a wedge from about 120 yds with the wind at my back, and plopped it right in the cup.
My current partner said, "That's great! You really showed him!"
Then we both missed our birdie putts and sulked over to the next tee. He said, "So you started your story talking about your first hole-in-one. How many have you had?"
"Just one so far," I replied, "But I'm optimistic."
My wife and I visited Chernobyl on Sunday. It was amazing. We took a small bus from Kiev and got to drive past many dachas, the weekend and summer homes for the wealthy. I think we should start calling our cabins in McGregor IA 'dachas' because it sounds cooler, and that's essentially what they are.
To get to Chernobyl you have to get past several layers of security and the guide that we paid took care of most of that for us. After getting past three sets of guards we finally met our local host. He had a Geiger counter, a device that clicks whenever it detects radiation. Initially it read between 1 and 5 ppm, and clicked once a minute, then when we got to the Chernobyl area it registered 20, then 30, then up to 100 and was clicking very frequently. As we pulled up close to the plant it got to 300 near hot spots such as vehicles that had been used to clean up the mess.
At the spot where you can take the best pictures, it was over 500, and we thought we'd better move along quickly. Then our host told us that inside, where people still work, it's 45,000 and workers can take only 20-minute shifts each day while wearing full protective gear. They assured us that our trip was safe and that we were actually exposed to more radioactivity on the trans-Atlantic flight than today. The workers are not at all concerned about the radiation, and the signs warning you about hotspots are ridiculously small and deliberately inconspicuous. I saw a six-inch yellow triangle and asked the host what it was. He walked over and his counter went crazy — over 1,000. He shrugged, "Hotspot".
The Chernobyl story is interesting. It was planned to be the electrical power generating station for 60% of the eastern USSR, with 12 reactors operating when fully developed. The accident happened in reactor 4 and they immediately stopped construction with reactors 5 and 6 nearly complete. You can see the half-built cooling towers with rebar still sticking out. Right now reactor 4 is covered with a 'sarcophagus', meaning they dumped concrete and absorbent material directly on the mess, and then welded metal structures around it. They are building a tremendous structure that will eventually be covered in more cement to lock in the radiation. It's an unbelievably huge project.
The complex housed over 50,000 people, with all the schools, banks, post offices, etc. needed for a small city. Now they have been totally vacant for over 20 years and it's eerily quiet with absolutely no insects or wildlife. The accident happened on April 26, 1986, and people weren't evacuated until the end of the May 1st parade, about a week later. There was a famous Ferris wheel that was unveiled at the parade, but people knew something was wrong and no one rode it, instead going to their homes to clear out what they could. The Ferris wheel stands to this day, never used. Officially 130,000 people died, but locals think the actual number is five to 10 times higher.
The contaminated zone, where no one is permitted to live, is 2,300 square kilometers. Some elderly folks returned after the accident because they had nowhere else to live and wanted to die where they had grown up. The site was designed to be a self-sustaining town and they encouraged young couples to live and work there. There are many parks and play areas for children, all abandoned. This fact was also somewhat responsible for the accident, because the plants hired mostly new engineers, fresh out of college, to work at Chernobyl.
Now about 3,500 people work at the site every day, mostly welders, forestry experts, and security people who ride the train in to work every day, about 200 kilometers away. The welders work to cover reactor 4 with metal to contain the radiation, which is still blazing hot 20 years later. The forestry people work every day planting trees to absorb radiation from the air and ground. There is also a special moss that absorbs radiation that we were warned not to step on.
The first workers on the scene were 31 firefighters, who fought the disaster for half a day before they were too weak. They all died six days later. The next batch worked for a couple of days and died three months later. Nearly everyone else who worked directly at the site after the initial disaster died soon after. Even journalists, who flew over the site in helicopters a month later, eventually died from exposure.
The site is laid out unusually because of the later modifications they had to make. There is a nearby village that was totally buried in concrete, which was then covered by sand a yard deep. Then they deposited soil and planted trees, so the whole area looks like a new forest that is just 15 feet higher than anywhere else on the site. Steam from the plants heated the entire area (about 400 square kilometers), so there are huge pipes everywhere. These are all rusty and leaking, obviously no longer usable.
There is a new power plant built by the US across the river from the site. It now provides power for the entire site, rather than reactors 1-3. They had to keep the old reactors running because they needed power for all the reclamation work, but the US was so concerned that there would be another disaster that it gave them a new power plant for free. There are massive electrical lines leading out from the plant, more and bigger than I've ever seen, and most now hang limp in the wind because they don't need to be maintained.
It was an amazing visit that made me question whether all the electricity we use is necessary, given the cost that this area is paying. It's even more incentive to work on biofuels, in my mind.
I tried to convert a few $100 bills to Ukrainian currency (the hryvnia) today. The woman behind the counter looked at them and gave them back. I got my interpreter to ask if she thought they were counterfeit. She didn't, she just thought they looked old and frayed. She offered me $90 in hryvnia apiece for taking such old money. I declined, and tried at another bank. They took one, but not the other.Then I went shopping and bought several things at one place, and pawned the old $100 on a merchant. Apparently devaluing currency due to its appearance is common here.
I talked to a guy who bought a bride at lunch yesterday. He was desperate to talk to anyone who knew English, and I looked American. We chatted for a while, then his "bride" came over. He was distraught because the ad said she was mostly fluent in English while in reality she knew none. She didn't like my talking to him, so she pulled him away. I think they'll be a great couple.
March 31, 2007 | Leave a Comment
Boyz II Men to hedge funds
Dennis Ross, composer and producer of the 1980s multi-platinum R&B group Boyz II Men, is understood to be readying a long/short equity fund for launch this summer. PBGB Fund is expected to begin trading with $20 million and to focus on US technology and biotech stocks. Ross has worked with the likes of Michael Jackson and Usher…
George Zachar conjectures:
Par Bonds Got Bling
Paid Boyz Get Booty
Portable Beta? Got Blunts!
Mike Ott adds:
Plan: Buy Google, Baby!
Please Buy, Going Broke
Post Bond, Got Busted
I just noticed that on CNBC they have a countdown to Bernanke's testimony incremented in tenths of a second.
Is this a new feature or have I just been unaware?
Scott Brooks remarks:
In a game situation, especially in basketball, tenths of seconds make a huge difference.
When I was playing we had clocks that measured only full seconds. When we had an inbounds pass with one second on the clock the question was always, "Do we have a long second or a short second?"
The difference between 1.5 seconds and 0.5 seconds was huge. It meant the difference between a rushed shot (almost having to push the ball toward the basket as soon as it hit your hand) and being able to make a quick deceptive move (maybe a fake step left, the fadeaway jumper to the right).
Unfortunately, in the markets, you can't stop the clock.
Mike Ott adds:
The clock in NCAA tournament games measures seconds. After it drops below one minute, the clock measures tenths of seconds. There is no difference, but time seems to go by faster because you have numbers spinning away faster than you can read them. It certainly works to increase my excitement, even in a relatively boring game.
I was watching On the Money, with Rebecca Quick, last night on MSNBC and toward the end of her segment she remarked that the Dow Industrials, Transports, and Utilities all hit all-time highs yesterday.
This confluence is rarer than one might think, just five occurrences in the past 30 years. Following this event the Dow has gone up four of the five times.
Mike Ott adds:
Also, CNBC has been talking about energy all week because of the CERA Conference in Houston. They are talking about biofuels tomorrow, and will interview one of my board members, Ed Williams. He'll appear live on CNBC at 8:45am Central time tomorrow morning, Friday the 16th, to discuss the effects of the biofuels boom on the rural economy. Tune in or set your VCR if you can!
November 8, 2006 | Leave a Comment
I got to ride in a Combine last night for the first time in my life. Neat experience. My farmer and I were talking as we watched coons run out of the corn. One of the things he said that this is a very unusual year. Corn prices are rising nicely going into harvest….according to him, not a normal occurrence.
Michael Ott replies:
Prices usually go down around harvest time because farmers are forced to increase supply because they simply can’t store any more corn. Most farmers have decent storage capability on their farms and sell throughout the year when they get a good price or need money. Obviously at harvest time storage is at a premium, so overflow goes immediately to market.
The huge demand for local corn due to ethanol has dramatically shifted the use, storage, and transportation of billions of bushels of corn. We’re seeing a lot of interest in building grain elevators, railheads and other fixed installations. I think this is the next wave of biofuels spending, because investing in new grain ethanol plants is nearly dead.
J.T. Holley Replies:
My buddy has a Deere 9660 with a satellite equipped system that literally drives the combine for ya “hands-free”. It also has A/C and XMFM built in. He could literally utilize wireless internet connection w/ a laptop, trade, harvest crop, and have lunch/dinner in that bad boy! Once seeing and riding in that fine piece of machinery you know why Mr. Simon won his bet.
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