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CHERYL TEVIS 11/01/2011 @ 9:13am 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.”

Maurice and Steve Grogan live the good life: raising quality cattle and caring for the land, while enjoying easy access to fine hunting and fishing. And the father and son manage to do it all within the shadow of the suburban Twin Cities.

The opportunity arose in 1959 when Maurice was hired as manager of Kelley Land and Cattle Company near St. Croix.

“Mr. Kelley said the ranch likely would be developed within 20 years,” Maurice says. “I'm still here, 52 years later.”

James Kelley's grandsons, Kelley and Hampton O'Neill, along with Maurice, and his son, Steve, own the ranch today. Steve Grogan joined as herdsman in 1975 after graduating from the University of Minnesota with an animal science degree.

Maximizing resources

Maurice had his work cut out for him, taking over 2,670-acres sorely neglected by a previous owner. His priorities were rebuilding miles of fence and soil fertility. “The first year it took six windrows for a bale of hay,” he says.

To utilize the 1,250 acres of lakes, woods, and wetlands in the property, Maurice created a licensed shooting preserve. He added a clubhouse, and in 1965, the Maple Island Hunt Club opened.

He also constructed a 700-head feedlot, installing one of the first pollution-control nutrient management systems in the state. His overall goal was to build a registered Hereford and Red Angus herd.

Steve later used A.I. to fine-tune reproductive efficiencies. He and his wife, Maryann, and their two children exhibited heifers at 4-H and open shows. In the mid-1980s, they began capitalizing on commuter traffic with a sign advertising freezer beef. Maurice's wife, Pat, handles this enterprise and sells 35 to 50 head a year.

They opened a dog training area and now host national dog field trials. “The lakes make it a prime location,” Steve says.

Following Maurice's retirement in 1997, they converted to a commercial bred heifer business. They sold their machinery, seeded cropland to grass, and added high-tensile New Zealand fence to create an intensive rotational grazing system with 55 pastures averaging 28 acres.

“We're more efficient with large groups and multiple bulls per group than running small groups of registered cattle with one bull and DNA'ing calves,” Maurice says.

The bred heifers are sold privately or on Superior Video Auction. Recently, they added a custom grazing business.

They work closely with the U of M, hosting tours and participating in beef research projects and trials. The variety of people-oriented enterprises makes for a unique workweek.

“Things don't stay the same around here for very long,” Steve says.

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