Scythe & Spade Blog

Culinary Creativity

At times, we become quite concerned about our cattle rancher partners and clients, continually under the gun regarding saturated fats, grain usage, water requirements, outputs, etc. And today, we must add the concern about costs of beef and what it is doing to demand.

But every cloud will have a silver lining, and our silver lining in the beef business is in large part what many restaurants are now doing with beef, and how that is translating into the grocery business as well.

Many restaurants and restaurant chains are changing cuts, changing names, changing style, all of which improves sales. Steakhouses are moving away from the dark wood motif, and are becoming chic with brighter décor, and a sleek look. Others are renaming common cuts of meat, like chuck roast becoming “flat iron” steak, or shoulder roasts becoming Denver steaks. Even flank steak has been exalted by many restaurants.

With people becoming more frugal and eating out less, and with beef prices at an all-time high, what can we expect but decline in revenue? What a pleasant surprise to see that steakhouse themed restaurants saw sales increase 3.5% in 2011 according to Technomic Inc., a research firm that charts the restaurant industry. Compared to all upscale restaurants (with waiters) which saw sales increase 1.8%, we have no complaints about steak themed restaurants which saw double the growth rate.

The culinary creativity of many steakhouses is being transferred to supermarkets which are renaming cuts of meat. Consumers who have eaten them in a restaurant now look for them in their supermarket. Have you seen a Delmonico steak, beef carpaccio, braised beef ravioli, or meatball fontina?

We can call this marketing gimmickry, but if it results in growing sales in spite of multiple pressures, who cares what we call it? Culinary creativity has helped a very big industry in America.

Healthy Eating

by Chas Bonner

We in the farming industry are blessed yet again. In the past few months, the popular press has been inundated with articles about the importance of healthy eating, and not just because of the exorbitant costs of being unhealthy. From almost any standpoint, human beings do much better eating healthy. To wit:

• The USDA recently released a study illustrating that healthy eating was cheaper than eating high calorie junk food, whereas many had argued in the past that one could get a full meal at a fast food restaurant, and for less than $3.00.
• If measured solely by calories, we get more in a fast food meal, but when measured by healthy calories, vitamins, minerals, poly-unsaturated fats, we get far more sustenance from simple fruits, vegetables, whole grains, meats and dairy products.
• When considering costs, most economists are now calculating full costs, and not just of the food, but the results of the food. We are well aware that the obesity rate in America is now over 30%, expected to rise to 42% by 2030. Obesity is now referred to as the “Next Great Epidemic” in America, and our obesity is largely caused by empty, but perhaps tasty calories.
• Because calories that come from junk food, donuts, candy bars, etc., are digested quickly (simple sugars can bypass the digestive system and go directly into the blood stream), hunger returns quickly, forcing yet more food ingestion and more obesity.
• Man has evolved over almost 4 Million years, and yet modern food processing has evolved over about 150 years. As a result, today we are eating foods that the human body has not yet evolved to eating and processing well.
• In many foods, up to 90% of the cost of the food does not show up at farm gate, but is all processing, packaging, marketing, shipping, and retailing cost. As a result, moving back to simpler foods is cheaper, healthier, and benefits farmers more directly.

We know there are exceptions to every rule, but our opinion is that current food trends will provide more benefit to the growers of that food rather than to the processors and marketers. There is simply too much evidence to support that thesis, and yes, we do feel blessed to be in this business.

Store Brands Help Farmers

by Chas Bonner

When commodity prices rise quickly as they did in the past few years (many now receding), a farmer might rightly worry that food consumption will decline, especially in the middle of a major recession.

A mitigating factor to those presumed food price increases is private label store brands which are normally sold far below national brand prices. 25 years ago when I was in the dried fruit business, our sales were primarily private label, and as a percentage of total food store sales, private label generally accounted for 15-16%. Today that number has risen to 28% of all food store sales in all product lines.

The first reason shoppers switch to store brands is price, and price savings vary, but are often dramatic. For instance, Symphony IRI, a market research firm in the supermarket space claims that savings on health and beauty aids total about 64% for store brands, about 34% for fresh, perishable items, 32% for frozen foods, and 22% for general merchandise. Those savings are understandable given manufacturing, marketing, sales and distribution costs of health and beauty aids vs. general merchandise, but even lower savings are important to a family striving to reduce cost of living.

Over the years, store brands have usually suffered a reputational dig. However, even though the primary driver of private label is price, many chains have upgraded private brands, and some even have a premium private brand. Publix Supermarkets in the Southeast is usually the highest rated U.S. chain, and like most competitors, it has a price-focused store brand. But more importantly, Publix has a very high quality private brand that has built its reputation as a quality chain, and has built strong customer loyalty.

Most other U.S. chain stores have also begun producing high quality store brands, realizing it improves loyalty. The companies which suffer are the producers and marketers of national brands, and they are now trimming their margins.

Farmers are a real beneficiary of the private label boom, as it keeps food prices to the consumer lower despite escalating food commodity costs. But remember that every pendulum swings, and when commodity pricing declines substantially, we cannot expect consumer prices to drop at the same time or rate.

Natural Gas & Agriculture

by Monte Nevitt

Natural gas prices are the lowest they have been in a decade.

Gas production is booming, having increased over 10% in just 2 years’ time. As is true of any commodity, overproduction equals reduced prices. Hydraulic fracturing, or “fracking” is a new technology that has opened millions of acres of shale rock that holds a great deal of gas, and it can finally be accessed. The number of rigs to access that gas has also increased as has the amount of acreage.

Because natural gas is the primary source of ammonium nitrate, the basis of nitrogen fertilizer, the dramatic reduction in gas prices should augur well for fertilizer cost. At the same time, other elements in fertilizer, namely potassium, phosphorus, magnesium, calcium and sulfur are getting harder to find and mine, so it is a pure conjecture where fertilizer prices might go. Luckily, fertilizer production accounts for a mere 2% of US output of natural gas.

There are other influences that will drive up the cost of fertilizer: 1.) Many of the dead plumes in river estuaries are blamed on nitrogen fertilizers; 2.) nitrous oxides in the air are far more deleterious than carbon dioxide, and most research indicates over 70% of nitrous oxides are the result of decomposition of nitrogen fertilizer; 3.) a problem recently discovered is that nitrates and nitrites that are finding their way into water tables, and that will prove a very expensive fix.

As one Newton’s Laws says, “For every action, there is an equal and opposite reaction.”

Food Borne Illness: Part III

by Chas Bonner

By now you are asking yourselves “Have we not heard about this before?” Our answer is YES, and we are now repeating ourselves for the third time. We are reminded that “Repetition = Recall,” and we want all of our clients and friends to remember the import of this topic.

In a new study by the Agriculture Department at the University of Ohio, Robert Scharff has estimated that the cost of food borne illness in the U.S. is $78BB, but this is only the medical, mortality, lost time, and suffering cost. What is not included in that figure are some of the “softer” costs, but which are nonetheless there. Not the least of those is the cost to primary producers---YOU---especially if you are the producer of a tainted food. But even if you are in the same product line, you will also suffer.

In an earlier blog, we discussed the alfalfa sprouts e. coli outbreak in Germany that took months to trace to the primary producer. All other producers in that region, and any European producers of sprouts were also hurt. Likewise, the listeria outbreak on cantaloupe grown in Colorado absolutely killed the cantaloupe business all summer, as sales declined over 30%, not just in Colorado, but throughout all growing regions. Finally, there have been several East Coast supermarket chains that have decided not to have multiple suppliers, despite market pricing concerns. They now feel there is so much legal risk to selling food that they want only one supplier, and if any problems, that supplier is passed the “hot potato.”

While you cannot prevent market losses from commodity problems like the cantaloupe or sprout examples above, you can prevent outbreaks of disease coming off your own farm. We cannot overstate the danger of this, as there are simply too many examples of producers going out of business. With our population refusing to take any risks in their lives, and with the propensity to always blame others, farming is becoming riskier.

Exercise due diligence, and if needed, we can help.

Corn Bottles

by Chas Bonner

While we complain about $4 per gallon gasoline, many of us buy bottled water at $8 per gallon ($.99 for a one pint plastic bottle of water). Then we run up the cost by dumping into the garbage, and current estimates are than 25% of all land-fill is plastic bottles. Decomposition of those bottles might take 1000 years, again adding to societal cost.

Naturally, there is a push for more environmentally friendly bottles, and the agriculture community is again the beneficiary. Clear, plastic bottles can be made out of almost any starch, corn, beets, potatoes, etc., by a process of fermentation which eventually produces polylactic acid which is yet another polymer.

For almost 20 years many companies such as Newman’s Own, Whole Foods or Wild Oats have used starch based bottles, but it was not until Wal-Mart decided to improve their sustainability image, and start using starch based bottles that the industry took off.

Some of the pluses of starch based containers are that it takes an estimated 65% less energy to make compared to oil-based polymers, manufacturing processes produce about 68% less greenhouse gases, corn bottles can degrade into fertilizer in short time (if properly composted), and we cannot imagine going to war over corn or potatoes.

There are always minuses to every product, but they are becoming fewer as we gain more knowledge about the product and manufacturing. Today, starch based bottles cannot take hot product; they melt. If thrown in the garbage with oil based polymers, the starch based containers lose their ability to compost, and take just as long to degrade as others.

Despite the downsides, we continue to see improvement in costs and processes, so we can foresee the day when virtually all food containers will be food based, and someday when all containers are made from reproducible sources.

And in the meantime, all of us in the agriculture business will see improvement in demand which never hurts our business.

Thanksgiving

by Chas Bonner

In our blog last week, we discussed what is right in America and the world.

Our short blog in this Thanksgiving week is based upon yet more good news seen in the December issue of Popular Science magazine. One of the 2011 Grand Award Winners for new scientific advances was Forage Boost, a microbial soil enhancer reportedly containing over 1 Trillion living microbes per milliliter. According to Popular Science, Forage Boost can substantially reduce or even eliminate the 180 million tons of worldwide nitrogen fertilizer use, blamed for causing algae blooms that kill aquatic life. It also increases productivity of land by 20%, decreases water run-off by half, and therefore reduces water use. It has been in development for over 10 years.

Because the product is so new to the market, there was little news in Popular Science. Therefore we urge you to check out the website of the developer: www.sumagrow.com.

Good news is always good at Thanksgiving time.

We wish all of our clients, customers and friends a wonderful Thanksgiving, and recognition of the bounty for which we can be thankful.

Fish & Agriculture

by Patti Jo Hardwick

Yes, there is a connection between fish and agriculture, and not just fish farming. Some of the connection is positive, some negative, but it all proves the inter-connection between most segments of our economy and our lives.

Having lived in Oregon for 15 years, I have grown more and more aware of the ocean fisheries and of the fishers whose livelihood depends on the health and sustainability of that industry. Therefore, when seeing a study done by McKinsey Company management consultants, I read it with keen interest.

McKinsey worked with the Food & Agriculture Organization of the U.N. and with the University of California at Santa Barbara for a long time. Their conclusions were that marine ecosystems around the world are broken, that fish are overexploited, and it probably cannot be stopped because over 180 Million people world-wide derive some or all of their living in an industry producing over $500 Billion in revenue per year. Most of the world’s population lives near the sea, many of them in the developing world where they rely heavily on the consumption of the animal protein for their food supply; without which could mean starvation. While the World Bank estimates that sustainable fishing might increase yields by 10-20%, if done, it would mean reducing catch rates dramatically in the beginning, and carefully controlling output around the globe forever, something improbable, if not impossible to achieve.

If a large source of protein in the human diet is depleted, where will it be made up? Given the critical need of those developing countries, plus growing middle classes around the world demanding more protein, where will it be found?

This is another example of the importance of agriculture today and forever. What is lost from the sea must be replaced from the land. We are thankful to be in the business, and hope to continue contributing to its success.

Farming Vertically

by Chas Bonner

There is general agreement among economists and demographers that between 2000 and 2050, world population will increase by 50% and food production must increase 70%. Do we have the land available, or can we expect that kind of productivity increase on existing and new agricultural lands to achieve a 70% increase?

One plan that has been heavily researched is to farm “vertically.” Most population growth has been urban, and demographers predict that by 2050, fully 70% of the world population will be in urban environments. As a result, farms should be built vertically in such environments (or that is one line of reasoning). There are some real plusses:

• Serve the locally grown movement, the “locavores.”
• Far less distribution costs.
• Less spoilage since most production is locally consumed.
• A fraction of the water use because crops would be grown hydroponically, and water is continually recycled with no run off.
• No soil erosion since soil is absent or insignificant in hydroponics.
• Most farm chemicals would see vastly decreased use, with exception of plant food needed to grow hydroponically.
• Air flow through growing crops provides them necessary carbon dioxide.

If so easy, why is this not becoming a reality? One primary answer seems to rule: LIGHT. Plants need natural light and sunlight. In a vertical farm, there are many floors of growing plants, and few can get enough light. To date, artificial light has not worked or is prohibitively expensive. Someday, maybe, but the jury is out.

So keep those farms running, hopefully growing more food with fewer inputs. “Horizontal farming” is essential forever, even if strides are made in the vertical farming arena.

Dairy Industry Future

by Chas Bonner

If anyone tells you with certainty about the dairy industry future, listen, learn, and then toss. There are as many theories as there are dairymen. The one thing we do know is that the business went through very trying times recently, roughly 1/3 of dairies are in “special assets” divisions of banks, and although economics are improving, the business is still questionable.

Because we had major interest from a Chinese company, we spent quite some time in southern Idaho and California researching the industry. The result of that research is we are more positive about the long-range future of the business than the past, but cost of inputs is a real negative for the business. Reasons for the relatively “positive” opinion (emphasis on opinion):

• Although fluid milk sales are down over the past 20 years, milk derivatives are strong. For instance, specialty cheeses increased as a category by 35% three years ago (granted, a small category), and all cheese is still increasing; powdered milk products are growing, with much of that going to developing countries; food scares have caused “Made in America” to be a strong marketing tool; milk derivatives are growing as a food additive; the U.S. government continues to push agriculture exports because that is the most positive contributor to our balance of payments.
• By 2050 China is predicted to have a GDP of $71 Trillion, double the U.S., and India will be right behind us at $35 Trillion. We are currently $14+ Trillion. Many dairy operators told us that an average 10% return annually was not unrealistic, but recognize years like 2007/08/09 can
  take you out of business. However, even if 10% cash return, one cannot expect the same value appreciation on a dairy as he can on farmland unless the industry booms.
• Several banks have stated that to remain competitive in the dairy industry, one must have size and financial strength because of the multitude of requirements for success.
• We often heard there are “Four immutable laws of the dairy industry:” 1. Must have owner or first rate dairyman on premise 24/7; 2. Veterinarian on staff or very close by; 3. Nutritionist at the dairy every day; 4. CPA do bookkeeping including Balance Sheets and Cash Flow statements, and close on a monthly basis.

Nationally, there appear to be fewer investment groups interested in dairy than in traditional farmland, and we believe the reason is the complexity of the business. That is a benefit to true dairymen as no one needs a big increase in supply.