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CHERYL TEVIS 03/10/2013 @ 2:34pm Geopolitical Skirmishes Trigger Supply Chain Concerns As the markets opened on March 3, and the world realized that Russia had annexed Crimea, equity markets plummeted on forecasts of macroeconomic problems and falling demand. Meanwhile in Chicago, commodity prices rose, implying supply problems. Six weeks later, no one knows which reaction was justified. However, the vulnerability of the agriculture and energy sectors to emerging geopolitical events is rapidly overshadowing the impact of weather as a growing topic of concern. “In agriculture, we’re used to a lot of turmoil,” Brian Oleson, University of Manitoba professor of economics told participants at a recent Washington, D.C. Farm Foundation Forum. “We have to live with a lot of price fluctuations. Every day when we wake up, the market has gone somewhere and is doing something. It’s a lot of noise to sort out. Yet we always have the constant question of global food security.” What’s the likely impact of current world conflicts on global energy and agriculture markets? “Energy and agriculture are absolutely inseparable,” Oleson says. “Regarding Russia, we ask the question: Is this just noise? Or is it an opportunity for pricing? Is it something that requires us to look beyond the next crop year, and start buying inputs? In the post war world period we’ve seen two big price waves: the Great Russian Grain Robbery and the ethanol boom. Is it possible that this is going to be one of those?” He adds, “We saw OPEC and the great Russian grain robbery march hand in hand almost in terms of the price effects that happened. But in terms of the second big price wave, in my point of view, the great farm prices of the last seven years were driven by ethanol. Energy and agriculture have become inseparable.” What significant trends in these two markets should producers recognize? “Big power politics is back,” says Charles Doran, Johns Hopkins School of Advanced International Studies. “None of the great powers have used force to annex territories since 1995. That’s being challenged now in Crimea. The Chinese also have expansionist views of their role in the Pacific. As a result, the U.S. is finding a need to reorient its presence.” Mideastern politics also remains a major factor. “The Middle East has 70% of the world’s exportable oil and natural gas,” Doran says. “There are civil wars between the Sunni and Shia Islamists in lots of places in the Arab world. There’s a transition going on in the leadership of Saudi Arabia, a key country in terms of oil and natural gas production worldwide. There are 2,000 armed, ideological Sunni fighting in Syria. What happens when they come home? The upshot is the probability of a major oil supply interruption is higher now than in quite awhile.” Doran contrasts the declining production of older oil fields in the U.S., the Alaskan North Slope, the North Sea, and Mexico with the “incredible revolution” in fracking and the output of shale gas and tight oil. “Two million barrels of oil a day now, as well as a lot of natural gas, are coming from places like Eagle Ford, Texas, and the Bakken formation in North Dakota,” he says. “In the short term, the Saudis have pegged the price around $100 per barrel. But things could change. Will increased production drive price down? Will the decline in old fields offset this? How fast will the worldwide movement of fracking technology develop? The Chinese lack water and pipelines, but they’ve already increased their output. Almost every country has access to this shale. It’s not always as easy to develop as it is here in the U.S.” He adds, “There’s a great marketing contest going on between the decline of old fields and the increased export production of natural gas and oil,” Doran says. “I wouldn’t want to predict how this will come out. I think on balance it’s not bad for those in agriculture who are worried about the price of petroleum and gasoline.” Despite predictions of U.S. energy dependence in the near future, Doran is cautious. “The oil industry has a saying, ‘All oil comes from a single barrel,’ “ he says. “It means that all countries are interdependent. The amount of oil and natural gas being consumed by the developing countries like India and China is expanding very rapidly, so we can’t escape the drag of what may take place there.” Outlook for Global Agricultural Production What’s the impact of civil unrest on global agriculture? “Production surprisingly isn’t affected big time by geopolitics in most cases,” Oleson says. “Farmers tend to just keep going. They may react in terms of delivery, or they may be affected in terms of inputs. Look at Argentina. I remember being there in the early 2000s, and farmers were just shoving grain into plastic storage bags as fast as they could. They didn’t trust the currency or the government, and would rather have their bank account in plastic grain storage on the farm than a bank. Argentine farmers, despite the fact they were getting one-half the price of U.S. corn, just kept on producing” Oleson refers to Russia, Ukraine, and Tajikistan as “the accidental exporters.” “Early in my career, this was the biggest importing region in the world,” he says. “The U.S. and Canada were fighting to see who would get the larger share of the USSR grain market. The interesting thing now is those three countries are vying to become top exporting region in the world. It’s absolutely astounding that they moved from being one of the biggest importing regions of the world to one of the biggest exporting regions of the world. And their grain production today is less than it was then.” He adds, “One question is whether the Baltic region is adding to world food supply issues and price instability, or is it part of the solution to world food price and food security?” Wheat Production as a Barometer Gary Blumenthal, CEO of World Perspectives, Inc., argues that geopolitical events exert a greater impact on oil supply than food supply. He has studied the impact of political instability on wheat production. “Of the food insecure countries in crisis, according to the FAO, 60% are due in part or entirely to poor governance and civil strife,” he says. “In the early 20th century, Argentina was the 10th richest country, and today it ranks at #55,” he says. “We know it’s because of poor governance. But what has happened to its wheat production? Through all the political turmoil, we basically don’t see a lot of impact.” Looking at a more volatile region of the world, wheat production actually rose during the 2011 Arab Spring, he says. Syria experienced a modest production decline of 3.8% in 2012 -13 during its civil war. “But generally wheat production not affected,’ he says. He points out that in countries like Iraq, wheat production is more often impacted by drought than civil conflict. “The long term trend in Iraq, despite 30 year of strife, is that wheat production has increased,” he says. Ukraine is just the latest example in the news. “The 2005 crop, the year of The Orange Revolution, was a very good crop, and wheat production bounced along fairly stable through the strife,” Blumenthal says. “The USDA Foreign Service attaché report fully expects a regular harvest of winter wheat crop this spring and planting of the spring crop, with no adverse impact on supply. “But it’s the complete opposite in energy markets,” he says. “Iraq oil production fell dramatically during the Iran/Iraq War, and it plummeted during the Gulf War, and then recovered. Libyan oil production dropped off during the conflict with Chad, and during the intervention in 2012, again there was a great drop off in oil production.” He points out, “Fossil fuel not only has not concentrated energy, it’s concentrated in a region where production is more subject to disruption. So energy markets should be watched more than food.” He adds, ‘What hurts agriculture is macroeconomic decline, a drop in demand and falling prices as a result.” He offers the rule of four as “a great metric.” (1) CPI inflation rate (2) Budget deficit (3) Current account deficit (4) Combination of those four in any given country. “This metric predicted the Asian financial crisis of 1997, and the Russian default in 1998,” Blumenthal says. “In each of those instances, the price of corn fell.” He suggests the following countries are poised at a threshold that indicates considerable trouble if the Federal Reserve starts to raise interest rates: India, South Africa, Argentina, Turkey, and Indonesia. “These countries need to take action, not so much individually, but collectively they could have a certain adverse impact on grain markets,” he says. But he concludes, “Geopolitical problems can depress economic growth, and therefore depress food demand. The increased economic capacity for people to buy better food is suppressed if the economy is hurt by geopolitical conflicts.”

Nancy Kayton Hansen's stories about how she spent her summer vacation were a little different than the other kids in her Naperville, Illinois, school.

Every year, for about six years, her parents drove her and her sister, Nina, to her dad's family farm in Mills County, Iowa. They made the eight-hour-trek with their dog, cat, and six rabbits in tow.

"We spent two months every summer with Grandma," Hansen says. "July 4 was a big time in Malvern. We helped the neighbor kids get their calves ready for the Mills County Fair. We had our own club for selling refreshments at farm sales, and we showed our rabbits in open class at the county fair."

Today Hansen's suburban yard in Geneva, Illinois, is landscaped with reminders of the Iowa farm: a milkcan that belonged to her grandfather, next to her mailbox; a pail used by her dad to heat barley for 4-H calves; a pulley used to bring hay up to the barn hayloft; a wagon wheel; a 100-plus-year-old plow; and a water pump. Most of these relics are planted to flowers.

"Since we can't make it to the farm as often as we'd like, one way we've made sure  the farm is part of our children's daily lives is by bringing things from there to our home and yard," she says.

Hansen, husband Jim, and children Katie, 12, and A.J., 9, have traveled to the Iowa State Fair three times to be part of Iowa Century Farm presentations. "Nina and I continue the tradition of going to the Mills County Fair with our families," Hansen says.

Their children are the eighth generation of the first Kayton farmer in Mills County.

"Dad has been very strategic about including his four grandchildren in the life of the farm," Hansen says. "Every year he gives them each a check from the sale of ‘their calf.' One Christmas our daughter, who was 5, opened the envelope with the check, a picture of the calf, and the bill of sale from the Red Oak Livestock Market, Inc. My mom told her that the calf was going to help her get to college. She looked up, puzzled, and asked, ‘You mean I have to ride a cow to college?' We retell that story almost every Christmas when the kids open their special gift from Grandpa."

Kayton Hansen's parents are gradually turning over decisions and tasks to their daughters. That's one reason why she joined with Mary Jane Hacker Glauber and Jan Costello Franck to form a group of women landowners called Generation Farmers.

"What it's all about is relationships," Hansen says. "Without strong local connections and good neighbors, we can't manage our farms from a distance."

Memories form the foundation of the Kayton family farm legacy, but her family also is looking toward the future.

"Every decision made on the farm is done with future generations in mind," she says. "We struggled with the decision to tear down our old barn, but knew it was the right decision for the future. The new barn went up last fall. To blend the history and heritage of the old and new barns, and its memories, we will use many of the barn boards as paneling in the bunkhouse of the new barn. It's there in case, we, or future generations no longer have a house to stay in on the farm.

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