In comparison to the recent 40-year period of relative stability in the price of the major agriculture commodities, 2007 has seemed like a ride on a giant roller coaster.
It isn't only the highs — $8 wheat and $4 corn, for example — that take our collective breath away, but also the volatility. A $1 swing in the price of a bushel of any commodity in a matter of days or weeks is commonplace. And while we've heard rumors of the coming of $100/barrel of oil for several years, we're almost there!
Conventional wisdom offers the logical explanation that the price of grains, livestock, supplies, oil and land are all trying to find new price equilibriums as the giant new ethanol industry explodes onto the marketplace. It certainly makes sense. This new “demand-pull” rather than “supply-push” marketplace is in many ways refreshing, as commodity prices appear to rise above breakevens for the first time in several generations.
Even cattle and beef prices have remained surprisingly strong in the face of high-priced feed grains. However, higher transportation costs have widened the basis for feeder cattle and grain in areas removed from the ethanol boom. Production costs also have soared; in fact, USDA predicts that despite record-high prices, net-farm income will remain unchanged.
Can the pressures in the marketplace to reach equilibrium explain all of this? Or could other forces be pulling or pushing in the agriculture sector of our economy? Perhaps!
In 1942, an economist named Joseph Schumpeter published a book entitled “Capitalism, Socialism and Democracy.” Schumpeter hypothesized that in capitalistic economies, innovations and their associated new markets push less-efficient products and services out of the marketplace. He termed this process “creative destruction.”
While his choice of words conjures up images of capitalism at its worst, there are countless examples around us. For instance, the telegraph made Pony Express riders obsolete. In turn, the telephone eclipsed the telegraph.
But today's telephone hardly resembles the phone of a few short years ago. With deregulation of the telecommunications industry and the breakup of “Ma Bell” has come a technology explosion. Today, handheld devices provide incredible service, are too inexpensive to repair, and can serve as an entertainment center — everywhere we go! The power of creative destruction in telecommunications has changed every aspect of our lives.
Creative destruction is also at work today in beef production. The 2007 fed-cattle market will average $4-$6/cwt. higher than many experts predicted just months ago. One plausible explanation is that thousands of new beef products in the marketplace have stabilized and perhaps increased consumer demand.
But perhaps a more poignant example of creative destruction is how the ethanol industry has changed American agriculture. The expected outcomes of this industry are enormous, including the reallocation of land use, the first new jobs in rural communities in 50 years, and hopefully a reduction in U.S. dependence on foreign oil.
Meanwhile, the unexpected outcomes are sobering. Oil isn't the only scarce resource involved here, and marginal lands will be plowed and converted to farmland. Wildlife populations may be negatively impacted, and the risk of major soil erosion will dramatically increase.
The price of food, certainly to the world's poorest people, will increase as well. In addition, major industry segments of the beef cattle production system may relocate.
Escorted by opportunity
The impact of the ethanol industry has been and will continue to be debated by all of us. In several years, the results may be clear. But today, they remain speculative and murky. However, as Schumpeter predicted, there will be winners and losers, for this change is not benign.
The price increases and volatility in the commodity markets are certainly evidence that the marketplace is finding new equilibriums. But at a more foundational level, change is being driven by the emergence of new technologies and new markets. It is being caused by the forces of creative destruction.
Some argue this change is artificial, as it's in response to policy. If that's true, then it's also true of the telecommunications revolution, as Ma Bell didn't break up voluntarily. Whatever the source, the change is irreversible.
At a policy level, the response of every concerned individual is to be part of an important debate. At the farm, ranch, feedlot, packer or processor level, the choice is clear ADAPT for creative destruction will most certainly create opportunity, as it forever changes the status quo.
Barry Dunn is executive director and Kleberg Endowed Chair at the King Ranch Institute for Ranch Management at Texas A&M University-Kingsville.