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October 23, 2008

Wheat, Fertilizer, Ammonia and Land Realities Threaten Global Food Supply

by Neal Rauhauser

Farming has changed dramatically in the last century. The horse as a source of power, the cow as a source of fertilizer, and triennial mix of corn, alfalfa or soy, and letting the land lay fallow is gone.

Today on the fertile lands of Iowa, Illinois, and Nebraska--our precious midwest farmbelt--the biennial dance of corn and soy is giving way to economic pressure from ethanol and advancing technology. Unthinkable even five years ago, today "corn on corn" is the norm.

Things are changing in equally dramatic ways in the drylands of the Dakotas, but the trend runs opposite to that seen in the wetter, richer lands to the east. Skyrocketing ammonia prices and limited moisture are driving lands out of annual wheat production and into a biennial rotation of fallow and wheat production.

This sounds like something only an agronomist could love, but the reality of the matter is that lives are on the line eighteen months from now based on the decisions farmers are making today.

Historically, a ton of ammonia equaled the cost of about eighty bushels of wheat, that is, $2.25 for a wheat bushel against $200 for a ton of ammonia. This ratio held for forty years. Two years ago that long standing relationship broke down. Today wheat is $4.50 and ammonia is $1,000 – over two hundred bushels of wheat are required to purchase a ton of ammonia.

The first effect of this has been a reduction in fertilization on wheat planted. Instead of 14% protein acreage, farmers will see crops with protein closer to the 8% range. Instead of the seventy bushels per acre achieved with full fertilization, farmer will see yields sliding off towards the twenty five bushels per acre unfertilized wheat yielded.

Fertilization isn't a “go or no go” decision, it's a continuum. But as the farmers seek balance, it is clear that this will be a case of less being more.

Another effect to be seen is the practice of simply idling land for a year. Wheat needs water as well as fertilizer, and the places where it is raised are much drier than corn country. The idled land may be left "chemfallow", where weeds are killed with Roundup herbicide three times during the season, or it may be left “summer fallow,” where the weeds are periodically wiped out by mechanical cultivation. Both of these practices allow the soil to rest both in terms of water and nutrients. The Roundup method has the chemical cost and attendant concerns while the cultivation method is much more fuel intensive.

Why would land be left out of production? Cash rent on an acre used to be 120 percent of the price of ammonia but now it's 50 percent of that $1,000. This makes the choice very simple; half of the land is left standing idle in any given growing season, accumulating water along with the improvements associated with leaving the organic matter from the weeds on the field. The financial effect is the same as fertilization only without the attendant expense and risk. Bryan Lutter of Nebraska based Producer's Hybrids puts it bluntly: "Farmers can't afford a thousand dollars a ton, so they've cut back on ammonia. Wheat protein percentages will drop from 14% to 8%. People are going to starve.”

Looking at global wheat statistics reveals that the troubles have already begun. Wheat production per capita has been in excess of two hundred pounds for the last thirty years, this even as our global population doubled and “end of season” stocks had stabilized around seventy pounds per capita. Three years ago the “end of season” stock level plunged to around forty pounds per capita, a drawdown blamed on a sudden rush to biofuels. Consumers were substituting wheat for the corn that was being turned into ethanol. More acres were being turned to corn reducing wheat, soy, and other cereal crop production. Corn production does not have the range of options that wheat does; this crop always gets an ammonia based fertilizer and other crops have paid the price.

Wheat production is not evenly distributed in the world. Wealthy western countries and the former Soviet Union produce the bulk of exports. Developing economies such as China and India are relatively self sufficient but each are under water stress. Nations such as Haiti, Egypt, Bangladesh, and Pakistan bear the brunt of the suffering.

The U.S. has three hundred million people and net exports about half of our roughly 60 million ton per year crop, which means we're providing 25% to 30% of the global wheat need. Australia yields a massive crop despite a tiny population of ten million. Canada’s export level historically approximates ours. The states that formerly comprised the Soviet Union continues its role as a major wheat exporter. The E.U. has a good share of global supply but experts believe that is continental trade. India's production and consumption fairly closely match, but they've been shedding ammonia plants at a scary rate and probably face the same protein deficit U.S. crops will have.

China has a variable harvest and will assume anywhere from zero to ten percent of the global export stream or about ten million tons. Their economic muscle allows them to purchase what they need. Hence, a bad crop year in China might not impact directly there but instead would be relocated to one of the places where food riots already occur.

Food stress is beginning to destabilize countries. Haiti, Egypt, many locations in sub-Saharan Africa, and Bangladesh have all seen food riots. Most worrying of all is Pakistan, with food riots on top of a shaky government, a cold war on one side, and a hot war on the other.

In the final analysis, two producers that make up fifty percent of exports are cutting back due to the impact of the natural gas market on ammonia production and one of them is in dire straights due to global warming. Global stocks are the lowest they've been in a generation. This has already lead to food riots and governments falling among the developing nations. It is food for thought—as long as the food lasts.

Neal Rauhauser is an analyst and consultant on energy and telecommunications.

The Cutting Edge

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