When I was a kid, I always pictured that the food on our table came from all those 'amber waves of grain' that we drove by when traveling throughout the Midwest. Naively, I thought those farmers were responsible for the produce we ate. It wasn’t until 2014, when I became the Chief Restructuring Officer during a large farm bankruptcy, that I learned the truth about the modern agriculture industry.
Not only do those crops not feed Midwesterners, but most don’t feed humans at all. What’s more, most of the corn and soybeans grown in this country would grow at a loss if not for farm subsidies from the federal government.
Finally, most large farming organizations all but abandoned traditional regenerative farming and crop rotation practices. Instead, they replace annual nutrients by pouring chemicals (such as nitrogen and potassium) onto their fields.
What some term as “conventional farming” today is a bastardized version of farming that only developed within the last 100 years. It relies on genetically modified (“GM”) seeds owned by seed companies (vs the farmer), heavy use of chemical nutrients, pesticides and herbicides. It produces chemical-laden crops, kills the soils and contaminates our water supply.
For thousands of years, humans employed organic, regenerative agriculture practices that focused on healthy soils and growing a diversity of nutrient-rich crops. To me, that is true conventional farming; not this bastardized, chemical-driven, industrialized farming today.
To learn more, let’s start with the crops themselves. Per the 2017 USDA Crop Production Report, U.S. farmers planted 319 million acres of farmland in 2016. By far the two most dominant US crops were corn (94 million acres planted, 29% of acreage) and soybeans (83 million acres, 26% of acreage). These two crops represent more than 55% of the total planted farmland in the US each year.
Guess how much of those crops do humans consume? Maybe 25%, and almost none of that in their pure and healthy original form. Rather, they serve it to us in the form of soybean oil, high fructose corn syrup (“HFCS”), corn meal and sweeteners.
If humans don’t eat all the corn and soybeans, where are all those bushels going?
Well it turns out most of it feeds livestock. Another large portion feeds ethanol plants to make biodiesel fuel. Per the USDA Economic Research Service, livestock consume 70% of soybean crops and 40% of corn crops, while ethanol plants use 45% of corn crops and 5% of soybean crops. Humans only consume about 21% of soybean crops (15% as oil and 6% as beans) and just under 10% of corn crops (mostly as HFCS and sweeteners).
Basically, we use most of our cropland to feed animals and cars! And where are our vegetables coming from? They come from California, and (to a lesser degree) Florida and Mexico.
Currently, 81% of carrots, 95% of broccoli, 95% of celery, 86% of cauliflower and 71% of spinach grow in California. But it wasn’t always like that in the United States. Certainly, some crops (oranges, nuts and grapes, for example) thrive in a drier, hotter climate. But, 100 years ago, the Midwest grew carrots, broccoli, celery, cauliflower and spinach—but not today.
The biggest change came during the Great Depression in the form of farm subsidies. The Great Depression was a devastating, decade-long economic downturn. The United States experienced 25% unemployment rates that threatened every major industry. The agriculture industry was no exception because people without jobs cannot afford any food, let alone fresh produce.
Politicians of the time feared for the stability of the US food system. If enough farmers gave up their farms and moved to the cities, the US would could not feed its population. Consequently, Washington passed three farm bills during the depression to stabilize profitability for farmers.
To efficiently payout subsidies, politicians needed to determine the best crops to subsidize. Ideally, they wanted t high-yielding crops that farmers could store for long periods of time (e.g., through the winter months) and that had a multitude of uses. Ultimately, the government chose corn and soybeans. Both were high-yielding crops. When dried, corn and soybeans stored safely for many months without rotting and they both had a wide variety of flexible uses in food and other production.
The government achieved its goal and converted farm acres to corn and soybean production. In addition, entrepreneurs found new, innovative uses for the growing surplus of corn and soybeans in the US, including:
inventing HFCS – used to sweeten foods and beverages
ethanol – for fuel
cornstarch – used in diapers and crayons
soy lechitan – used in frying fats and margarines
The same is true for our growing reliance on corn and soybeans. We ended up with a huge surplus of these crops each year, and prices fell to levels that made profitable farming difficult.
If you looked at a long-term chart of corn prices, they bounced between $2.00 and $4.00 per bushel during most years since the 1970s (except for a brief weather-related spikes). Yet, most experts peg the break-even range for farmer profitability for corn between $3.00 and $4.00 per bushel (the high end of the historical range). In fact, an analysis from Farmdocdaily.com suggests break-even is above $4.00 per bushel in average US soil. With the current price around $3.70 per bushel, most modern corn farmers struggle .
Not only are revenues a struggle, but the costs for GM farmers rise steadily each year. First, the seed companies own the GM seeds, they patented those seeds and their costs increase each year.
Four companies control more than 80% of corn seeds and 70% of soybean seeds in the United States. The USDA ERS estimates that GM corn seeds and GM soybean seeds increased 325% and 259%, respectively, from 1995 to 2011. As noted earlier, this occurred during the backdrop of flat corn and soybean prices for farmers.
Add the increasing costs of chemicals, herbicides, pesticides and farming equipment, and you can see how farmers became indentured servants to the big agriculture conglomerates.
The system is broken. And I think a big dislocation is coming for Big Ag.
Consumers increasingly seek organic food and non-GM food products that avoid a variety of chemicals. The US organic industry posted sales of over $43 billion in 2015—up from just $14 billion in 2005. Unfortunately, while organic demand booms, only 1% of the farmland in the US is certified organic.
Most of the organic food we buy in this country comes from other countries (because the US farmers change slowly). That won’t last. Organic demand won't abate and, eventually, that will be a big loss for the Big Ag companies.
The story is not all doom and gloom in the US. There are glimmers of hope that lead to optimism.
Pockets of organic farmers adopt sustainable and regenerative agriculture practices. One of my favorite books on the topic is Lentil Underground by Liz Carlisle. It tells the story of a renegade band of farmers in Montana that produce organic produce using regenerative agriculture practices.
In regenerative agriculture, a farmer plants a diverse range of crops each year and rotates them throughout their fields. Each of the different crops return certain nutrients and bacteria into the soil to maintain a healthy balance. It doesn’t need any chemicals; instead certain crops, like legumes (beans, lentils and chickpeas), provide Nitrogen to the soil while other plants provide other vital nutrients. It is a fascinating story that caught the eye of the large natural grocery chains, who are customers, as well as sustainable-focused companies such as Patagonia and Blue Apron.
The farmers can earn much higher crop prices per acre (often double that of corn) and they also face lower costs (as they don’t need GM seeds, chemicals, pesticides, etc).
Another great sustainable agriculture story comes our way from the documentary Sustainable by Hourglass Films (available on Netflix). It chronicles an amazing group of chefs in Chicago, led by Rick Bayless, and their desire to build a local, sustainable source of organic produce. They made a deal with a group of farmers in downstate Illinois to grow their organic produce with a guaranteed customer base.
That group became a sizable organic army supplying many of the best restaurants in Chicago. It also lays out a model for other cities to mimic in building their own local organic supply of fruits and vegetables.
The world is changing and it's led by consumers, especially those under 40 years old. They want better-for-you food with cleaner ingredients and sustainable agricultural practices. They vote with their wallet both at grocery chains and restaurants. It took the big consumer packaged goods companies many years to see this trend, but they began adapting to meet the needs of these consumers.
Most farmers—and Big Ag—have not yet figured out that this trend will change demand for the next 20 years. Eventually, they will get it…or they will cede the market to these renegade organic farmers (and other indoor farming entrepreneurs) reinventing the industry.
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I am a PE investor focused on the food and agriculture industries. I share insights on the food revolution in an article on Financial Poise. You can subscribe to my column to learn more about the trends in food, sustainable agriculture, nutrition, etc.
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