Lori Walsh: Last year, severe flooding. This year, a pandemic. How is COVID-19 effecting things like trade, prices, supply, and interest rates. Kevin McNew is the Chief Economist with Farmers Business Network, and he has some thoughts on these issues and more. Kevin, thanks for waiting for us and thanks so much for coming back to In The Moment with an update. We appreciate your time.
Kevin McNew: You bet. Thank you, Lori, for me coming back.
Lori Walsh: Yeah, let's start with the big picture. A tough year, again. Some opportunities. Where do you want to start? We have lots of topics to talk about here. Where do you want to begin?
Kevin McNew: Yeah, unfortunately we seem to be thrown a lot of curve balls in agriculture. You know, we talked the last year and a half about the trade war issues. We finally got that settled in January and things looked to be turning better. And then, of course, the Coronavirus and all the consternation and struggles that that has presented are obviously top of mind for public health and for the broader economy. But they are having widespread impacts on agriculture. So, these are very serious times for our farmers out there. Prices are really just taking a nose dive here. Today, in particular, we're seeing crude oil trading down to unprecedented levels of $5 a barrel. Just on Friday we were at $18 a barrel, and 18 seemed really cheap then. So, with it comes, commodity prices that are just kind of falling off a cliff here.
Lori Walsh: Yeah. We talked last week extensively about the impact on hog producers of the closure. Though we believe it to be a temporary closure, we don't know when Smithfield plant in Sioux Falls will reopen. Let's talk a little bit about ethanol, Kevin, and some of the challenges there because ethanol prices are also plummeting.
Kevin McNew: Absolutely. They started diving early, kind of in sympathy with crude oil, ironically at the start of this back in mid March. Really sort of started not only the Coronavirus trajectory, but it also was a trade war between, or excuse me, a crude oil war between Russia and Saudi Arabia. So, ethanol really has a double whammy here. It has the fallout from the price war between Saudi Arabia and Russia. And then we had the shutdown in driving and driving habits. So, kind of a double edged sword here, which really caught ethanol at a bad dime.
So, one of the things we've been watching at FBN is population mobilities, and so cell phone records and cell phone data that are really now becoming more publicly available as the country starts to think about how are the U.S. population and their consumers moving. This has not only social health issues, but it also has implications for economic activity, and in particular driving habits.
And one glimmer of hope that I think is optimistic for maybe a return to normalcy here, at least at some level, is we're actually seeing mobility start to turn higher from consumers. Maybe a little ahead of schedule. And certainly I know public health officials would probably not like to hear that, but the data from U.S. consumer cell phones suggests they're actually, in the last week at least, being much more mobile than they were even a week or two ago. So maybe that will translate into better gasoline disappearance and better ethanol disappearance as well.
Lori Walsh: Interesting. All right, so what happens? How will farmers and producers being helped or not helped by federal programs and the changing interest rates? Are there opportunities here for assistance, or to think longterm financially?
Kevin McNew: Yeah. Interestingly, last week the USDA and federal officials did announce some assistance to farmers. I believe the total price tag for farmers from the Coronavirus was around $16 billion, and that'll be allocated through a variety of measures. Some of it direct payments. A lot of it to the livestock producers, like you mentioned hog, beef, and poultry have been directly impacted. So a lot of that will go to them. There'll also be some commodity purchasing going on to basically take excess supplies off the market, potentially push them to food banks and things like that. And then some of it will go to crop farmers. So, most people would say in the agriculture sector it won't be enough to weather this storm, or to stop the big drops in prices. But at least it's something to put in farmers' pockets in very challenging times.
Lori Walsh: I want to go back to something you said there about redistribution, because we've heard several stories from specialty producers in South Dakota who came on this program and were trying to direct sale salad greens and eggs. And we talked to hog producers who were trying to avoid the really unenviable decisions about what to do with piglets who are just coming up when they couldn't move their hogs out of their barn right now.
And you mentioned redistribution to food banks. Restaurants at some point dumped, some restaurants, dumped a lot of products, a lot of food while people went hungry. There isn't a food shortage unless, of course, you have a plant closure for example, or a group of farmers fall ill. But there is a distribution and how we re-imagine those things. Talk a little bit more about the importance of quickly pivoting to ways where you can get the food out of the fields or out of the barn and to the people who need it, because that's critical right now.
Kevin McNew: Right. And that's the huge obstacle in this. I remind people, we don't have a supply problem. We don't have a demand problem. We have a distribution problem. We have a distribution and manufacturing problem that is challenged in our food system. So, the underlying supply of commodities is the same. Consumers still need to eat. They may change where they eat, but they're still eating roughly the same amount of food every day. So, all these price gyrations are really just a function of logistics and supply distribution problems. And, unfortunately, we have a system in place that's really set up for distribution through large scale systems.
And so, like you mentioned, farmers trying to take some of their commodities to directly to consumers. That's not a system that most of our producers are accustomed to. They're accustomed to going through normal supply chains to move their commodities and get them sold. And so, we're not really well equipped because we do it at very cost effective manner, which is in large scale and not really one on one with consumers.
So I'm not sure there's an easy answer there, Lori. I think it's going to be we have to get through this storm, and I think the economy will. We'll get back to something that is more normal than today. It may not be normal compared to two months ago, but it'll smooth out and we'll see hog and meat processing going back to normal, and other distribution systems working back to normal as well.
Lori Walsh: Where we set up, and I'm asking a broader question here from people just like me, sitting here in my kitchen on a Saturday morning thinking about where my eggs come from in a new way. And knowing that there are plenty of producers near me where I can start sourcing my eggs. People are thinking about what relationships do they have with individual farmers. Is that important from a broader economic scale? Do people kind of figuring out how to source things locally, does that make an economic difference? Or is that just a nice story of community support and knowing where your food comes and supporting local producers? But, do you see what I'm asking there? From a big picture standpoint, do those kinds of actions help, or are they just going to fall by the wayside because really this is all about efficiency and volume and getting back to what was once considered normal?
Kevin McNew: Yeah, that's an excellent point, Lori. I think there has been, over the last five or 10 years certainly, that CSA movement, if you will, that community supported agriculture. I want to know my farmer. I want to go buy the commodities or products from them. So there's that, what I'll call, minor, small or trend in food and agriculture going on. Does that displace the broader I'm going to go to a big box store and buy things in bulk? Probably not. It doesn't necessarily do that. On a small scale it has impact, and certainly consumers who want that touch with the farmer, who are seeking out that knowledge and that relationship with the farmer. That has happened and it has been moving somewhat slowly forwardly. I just don't see it as really displacing what is the broader agricultural food system in America and the world, which is efficiency. It's driven by large scale volume and efficiency.
Lori Walsh: Does it help the individual farmer diversify, or only smaller producers are really going to be in that market?
Kevin McNew: Yeah, that's another excellent point. Part of the large food system that evolves means that farmers themselves are also very specialized, because they produce one or two commodities now. Back 50 60 years ago, farmers were more diverse. They were growing more products, more crops on a smaller scale. And that's not true anymore. So the farmers that make that move to want to do more consumer driven types of products, it's a much different scale. It's a much different economic problem that they have to solve. So instead of being big and efficient, they have to be nimble and agile and doing a lot of different things. Not just growing a product, but marketing it, distributing it themselves. Management around consumers that they're dealing with. So, it's a much different problem that a farmer solves when they enter that space. I'm not saying they can't do it, but it's not going to happen at the scale that large commercial agriculture have always happened at.
Lori Walsh: You almost have to have somebody else in your family who that's their part of the business. Similar to a hunting lodge or some other kind of diversification there. Interesting. Talk a little bit before we let you go about-
Kevin McNew: I think you're right, Lori. It's a family oriented endeavor. You have to have the labor to do it and in many cases that relies on family members.
Lori Walsh: And Kevin, before I let you go, I'm wondering if you could address this notion of a protein gap, because when Smithfield closed its doors they sounded an alarm that said this could impact worldwide pork supply, protein supply. They were challenged on that from other news organizations who said, not so fast. There's plenty of meat. This is not going to try things up. But what do you know about the gap in protein, the demand for pork worldwide that is relevant for this time?
Kevin McNew: Yeah. And I think that story goes back to really 18 months ago when China had the ASF, the African Swine Flu problem that decimated half their hog herd. So you're talking about the world's largest hog producer in the world and the largest consumer of hogs and pork basically, suddenly having this huge shortfall of protein.
So, I would agree with that notion, and that's what we've been telling farmers, is that short run, yeah, there's a lot of constraints on the food distribution system that are causing price gyrations. But longterm there is a protein shortfall in the world that needs to be filled. And we're not seeing it today because of the distribution problems, but longterm, yeah, we have to eventually ramp up protein supplies.
China has had the reach out to other countries to buy protein, whether it's pork or even branching out into beef, which they normally haven't done. But because of the shortfall they're having to buy beef from Brazil, for example. And so, I do think longer term, that will be a driving stimulus in agriculture, is the demand for protein. Before probably a decade ago, it was the demand for ethanol. Before we had the trade war with China, they were buying beans from us. But I think, longer term, I think the next evolution of agriculture in the next five years is really going to be about the demand for protein.
Lori Walsh: . And avoiding the next disaster that is probably waiting for us six months from now that we don't, or two weeks from now, or six hours from now that we haven't foreseen yet. Kevin McNew is Chief Economists with Farmers Business Network. Thank you so much for being here. We look forward to talking to you again.
Kevin McNew: Thank you, Laurie.