Flooding the market

Midwest floods mean joy and pain for New Mexico's farmers and ranchers.

ALBUQUERQUE -- As flooding begins to abate in the Midwest and analysts assess the damage to America’s breadbasket, we now have time to wonder: How will this farm devastation affect New Mexico? Well, there’s good news and there’s bad news. Mostly bad news.

While local farmers are earning record prices for corn and wheat, the state has more ranchers — who buy those grains to feed their cattle — and they say they’re "getting killed” by the cost of grain. According to the American Farm Bureau, weather has caused more than $8 billion in crop damage this year. Although the losses due to flooding were not as severe as experts feared, about 2 percent of the U.S. corn crop was destroyed, adding to pressures on corn prices from increased worldwide demand and ethanol commitments.

(In this video, dairy owner Dean Horton talks about the price of feed.)

“Every time supply and demand is disrupted, prices go up, period,” Steve Warshawer, enterprise development manager for La Montanita Co-op, says. Warshawer, who is also a small farmer, doesn’t blame producers in New Mexico for taking higher prices because of increased demand, even if it’s related to disaster in the Midwest. “When speculation occurs and prices go out of control, what do you do? Do you take the extra money, or do you hold the line?” he asks. “People who have been losing money their whole life say, ‘Holy shit! I have a chance to make a buck!’”

Indeed, luck has been good for Southwest grain growers this season. “We’ve sold wheat higher this year than we’ve ever sold it in our lives,” says Pat Woods, a farmer and rancher who lives in Broadview, near Clovis. “We got over $8 per bushel! The last time we sold wheat, well, $5 was the most I’ve ever got before. That side of [the business] is just fantastic.”

So does that mean New Mexico grain growers are all going out to buy new trucks this year? “No, it does not,” Jary Lewis, an agricultural markets reporter for the New Mexico Department of Agriculture, says dryly. “Their production cost has increased probably in the same range.”

Just as the price of fuel burns urban commuters, the cost of diesel, natural gas and propane hurts farmers, who use fuel to run their equipment. “Fuel is just killing us,” Woods says. “Every time I fill up one of my big tractors it’s $1,000.” So instead of using the tractors for weeding, he’s using chemicals to keep weeds down (since applying herbicides requires fewer passes across the field and uses less fuel with each pass). Later in the season, when the fields go fallow, he’ll turn out cattle to graze the fields clean, instead of using equipment.

Partially because farmers hoping to cash in on high prices planted more acres of corn than expected, the flood damage wasn’t as bad as it could have been. But that consolation hasn’t stopped prices from fluctuating wildly. Grain prices could remain high if the flooding continues and the crops in the Midwest are damaged more, but Lewis predicts that “It probably will not be a banner year for farmers."

Meanwhile, ranchers and dairy operators are being squeezed almost to the breaking point.

“Now let me tell you the downside [of high grain prices],” says Woods. “I raise cattle, and I buy corn and dried distillers grains. Those two commodities have gone through the roof. That makes it pretty tough to break even on your cattle enterprise.”

The price of corn has been hovering under $3 per bushel for most of the last 35 years; last Friday, the price hit a record high of $8.96. As NMI has reported, part of the increase is due to increased demand from countries such as China, and part is due to ethanol subsidies that came about when the price of corn was low and supplies were plentiful. 

Dean Horton, owner of Las Uvas Valley Dairy near Hatch, blames government ethanol subsidies for driving up the price of the corn that he buys by the truckload to feed his dairy cows. Flooding is devastating, he says, but making corn into fuel is worse. “No one, including our president, ever thought about what the unintended consequences may be on having so much corn — 33 percent of the crop! — tied to ethanol. I’m all for alternative fuels, biodiesel and ethanol, but I would have done it with sugarcane and beets instead of corn.”

Horton suggests the government should step in to curb the runaway price of corn. “If this were happening in China or Europe, they’d cap it. And the minute they put caps on [the price of corn], it shuts the investors down,” he says. “China would never let this take off. They’d let fuel run short before they’d let the price of food run away.”

The investors Horton refers to are people (or investment groups) who buy and sell futures with no intention of actually buying corn or rice or oil. (In theory, buying a futures contract means you agree to buy an amount of a specific thing, at a certain price, at a set point in the future; in reality, many futures contracts are bought by investors hoping to make money when prices rise. For more on futures, click here. Or refresh your memory of the orange juice futures plot line from “Trading Places” here.)

“What’s happening is the ugly side of a speculative-based economy is coming out,” La Montañita’s Steve Warshawer says. “You introduce chaos,” he says, referring to the recent flooding, “and the people who are interested use chaos to get richer.”

Recently, investment funds have been making huge investments into the market for corn and other commodities. There has been much criticism of speculators, but not all agree that investing in commodities futures should be banned. As the New York Times recently noted: 

Although it is common in tough financial times to blame the speculators, this escalating hostility toward them is starting to worry people with years of knowledge about how commodity markets work. Because without speculators, they say, these markets do not work at all. Speculators, people willing to risk their capital in search of high profits, are central to healthy commodity markets, they say, and broad-brush restrictions on them could damage markets that are already under pressure from rising global demand for food and fuel.

This year, it’s New Mexico cattle ranchers, dairy producers and Southwest feedlot owners who will pay the most for rising grain prices. Those who have contracted ahead may even lose money when they sell their cattle or milk. 

The scramble for reasonably priced feed has also done damage to important relationships in rural communities, Horton says. “The unintended consequences [of price spikes] is that farmers are out to survive and we’ve got pandemonium and chaos in our markets. You’ve got dairymen being cutthroat with other dairymen, when it used to be hands-off. There’s no loyalty. Everything got thrown out the door.” He can’t blame corn and alfalfa growers for making money on their crops, or other dairymen for doing what they can to get their milk to market, but when it’s over, “We’re going to have hard feelings,” he says.

Warshawer would like to put a stop to investors’ manipulation of the market for food, something Connecticut Sen. Joseph Lieberman has championed in Congress. “The only people who should be allowed to own futures on food should be required to take delivery,” Warshawer says. “There’s nothing wrong with contracting ahead, but that’s different from buying a position on a commodity that you never intend to acquire. When there’s a flood or a drought, the farmers don’t get rich. Speculators do.”

When the price of grain spikes as high as it has, ranchers, dairy producers and feedlot owners may lose money when they sell their product. “This could throw us into a depression, easily,” Horton says. If he can’t sell his milk for more than it cost him to produce, “Then I have to go borrow money, or take it out of a pot — if I have one — or go without.”

Although young people are leaving farm life behind like last year’s fashions, Woods, for one, has no intention of quitting. “My whole family’s been here for 100 years, and by golly, we’re going to try to tough it out.”

print Share

Register or log in to rate