The World Can Feed Itself

Man’s survival, from the time of Adam and Eve until the invention of agriculture, must have been precarious because of his inability to ensure his food supply.
– Norman Borlaug

The Wall Street Journal carried an article Labor Day weekend entitled “Can the World Still Feed Itself?” The reporter interviewed the Chairman of Nestle (the world’s largest food company), Peter Brabeck-Letmathe.  Mr. Brabeck-Letmathe rekindles the so-called food versus fuel debate, bemoaning the amount of grain and oilseed in the U.S. and Europe being used to make fuel.

His comments need to be understood from the perspective of a large food company.  Life at Nestle’s purchasing department was much easier in the days when surplus grain and oilseed supplies, supported by an assortment of government policies, led to very low prices for major ingredients.  This was the prevailing economic environment for decades.  Margins on branded products made from commodities such as sugar, coffee, corn syrup, flour, and milk were generally fat and predictable.  Today’s world is much more challenging for Nestle’s purchasing department.  Prices are higher for most commodities, and quite volatile.

Much has been written regarding the food versus fuel debate, very little of it informed.  In the case of ethanol use in the U.S., a great piece of analysis from Bruce Babcock and Jacinto Fabiosa was published recently.   Their work demonstrates that ethanol subsidies have contributed somewhat to high corn prices and higher food prices since 2005, but the impacts have been small.

What many or most critics of fuel production from grain and oilseeds typically miss entirely is the impact of market dynamics and innovation.  Individuals, companies, and markets don’t stand still in reaction to changing prices and markets.  Rather they adjust; sometimes quickly, other times more slowly.  But they will adjust, and often in ways unanticipated by most market participants.

As a simple example, the Agricultural Entrepreneurship Initiative is involved in a project reflecting adjustment to utilization of corn for ethanol.  We placed three interns this summer at Farmers Cooperative – Afton to work on a business plan for a new feed business.  This feed business will create feed for cattle from corn stover and grain processing by-products such as DDGs from ethanol plants.  The business concept is to replace expensive corn and alfalfa in cattle diets with cheaper ingredients and to extend diminishing pasture acreage through supplementation with the new feed products.

The student interns conducted market research, financial analysis and reviewed engineering processes for a new business the Cooperative is considering, with the support of ADM Alliance Nutrition.  Without giving away the specific results of the project, I can write that the analysis was very promising.

In a larger context, however, what I learned was that there is a lot going on the feed business to adjust to higher prices for feed ingredients like corn and soybean meal.  A common comment from industry experts involved in the project was that “we were lazy for years with cheap corn and soybeans in terms of experimenting with alternative feed ingredients.”

There’s been a lot of press on various projects to utilize corn stover for ethanol production, but it turns out there is also a lot going on related to use of corn stover for a much simpler processing ‘machine’, the ruminant animal.  Rather than just grazing cattle on corn stalks in the Fall, however, this involves the application of modern processing technology to make it a more scalable business.

Utilization of an under-valued resource in a new way or place is a classic form of innovation, and one that is being exercised as agriculture adjusts to a new market environment where a higher proportion of grain and oilseeds is utilized for fuel and other products.  Higher grain prices have created returns to crop farming not seen in decades, but it is mistake to assume that the only adjustment to those challenged by higher prices is to return to the pre-biofuels past.   Those involved in the feed and livestock business in the U.S. Midwest are adjusting, and I suspect that the purchasing department at Nestle will also.