Why Are Farmers Dumping Commodities When Grocery Store Shelves Are Empty??
One of my friends is a large potato grower in Idaho. On his Facebook page the other day, he posted the following: “FREE POTATOES – We started dumping potatoes today as we have no home for them because of this Covid 19 disaster. The potato supply chain has definitely been turned upside down. If you would like a few bags come on by.”
Social media has been blowing up in recent days as people discover that farmers across the country are dumping milk, disking up vegetable fields, culling herds, and the like. The Wall Street Journal, The New York Times, CNBC, and many others have run stories highlighting the problem. Some stories have been fairly accurate, while others have been misleading. Scroll through the comments sections on the article pages social media posts, and it’s obvious many people still don’t understand what’s going on.
The food supply chain is complicated and miraculous. On average, one US farm feeds 166 people for a year in the US and abroad, according to the American Farm Bureau. For every dollar spent on food in the US (whether at home or away from home), US farmers and ranchers receive about 15 cents. What makes up the other 85 cents?
A variety of costs are incurred beyond the farm to ensure we have a plentiful, safe, diverse food supply available on demand. Transportation, storage, processing, packing, and distribution take almonds from California, potatoes from Idaho, apples from Washington, wheat from Kansas, broccoli from Maine, and citrus from Florida to restaurants, schools, and stores near you. And it’s always there when you show up to purchase in the grocery store or consume in the restaurant.
So that 85 cents is buying climate-controlled storages, automated sorting, washing, and packing facilities, milling and processing facilities, trucks and rail-cars for transportation, stores and restaurants, as well as paying for all of the people employed at every step of the way! It’s amazing! Even with all of that, food in the US is among the most affordable of any country in the world.
After rattling off all of these supply chain costs, there’s one commonality that should jump off the page at you–the food supply chain beyond the farm is incredibly capital intensive. On top of this, every type of food we have available to us requires a specialized supply chain and economies of scale to perform the way it performs. Hmm…capital intensive and specialized. What does that mean for us today as we deal with Covid-19?
Let’s discuss how we consume our food. We eat fresh food, we eat processed food, we eat at home, we eat away from home. Most food consumed at home is purchased at grocery stores of one kind or another. Packaging and portions are geared towards feeding a family. Butter comes in sticks (8 tablespoons), milk in gallon jugs, fresh fruits and vegetables in small bags or even purchased one at a time, frozen foods in packages geared towards one meal.
On the other hand, these same foods when supplied to restaurants and work/school cafeterias (food service) are packaged totally differently or may not even be interchangeable due to different quality standards in grocery vs. food service. Butter comes in twenty pound bulk tubs, for example. A visually less desirable potato (doesn’t taste differently–just doesn’t look as good or isn’t sized quite right) may go to food service in a 50 lb box rather than a grocery store in a 5 lb bag because a chef in a restaurant will prepare a potato dish for 100 people who never see the raw potatoes in the first place.
Processed foods add more complexity. We’ll use french fries as an example. McDonald’s has incredibly stringent requirements for what ends up being called a McDonald’s french fry. Only certain potato varieties are acceptable, and entire processing plants are tooled to create only that french fry. Thousands of acres of potatoes are planted, grown, and harvested specifically to become McDonald’s french fries. The potatoes are stored, sometimes for 9 or 10 months, before being delivered to the plants where the potatoes are washed, sliced and flash-fried a particular way to produce those fries, and then they are packaged for delivery to the restaurants–usually in 25 or 50 lb boxes. You can’t buy a McDonald’s french fry in the frozen food section of the grocery store regardless of how it is packaged, and even if you could, who is going to buy a 50 lb box?
All of these incredibly complex, specialized, capital-intensive supply chains for our food have been turned on their heads. Food service (remember–restaurants, cafeterias, etc) has been nearly completely shut down all across the country and even across the world. Grocery stores have been emptied as people stock up because they are worried and are eating at home more.
The assets in the supply chain that produce, store, process, package and distribute our food cannot be repurposed overnight. For example, one new fry production line in Idaho can produce 400 million pounds of fries annually and required a capital investment of $200 million to build! Another example: a fresh pack shed for potatoes that fills 10 lb bags requires different packing machines to fill 50 lb boxes. Those machines cost tens of thousands of dollars each, and aren’t available to be purchased at the local hardware store. Most of them are built to order and could take months to procure and bring online in a pack shed.
Another example from milk: dairy cows are milked two and sometimes three times a day, producing on average about 8 gallons of milk. These living factories can’t be turned off. They must be fed, and they must be milked, and the milk is perishable for the most part. The current crisis has eliminated nearly half of the daily demand for milk and milk products through the shutting down of food service. Grocery store demand for milk, butter, and cheese is through the roof, but the supply chain that was supporting food service can’t easily or quickly be repurposed to meet the shift in demand.
Another challenge is that no one knows how long the current demand shifts will persist. What do you suppose the payback period is on a $200 million french fry line? I don’t know that exactly, but in order for the cost of food to be as affordable as it is, I’m guessing it is probably decades. The Idaho plant expansion I referred to took two years to construct! How can someone justify a huge capital investment without having some comfort the investment will pay off?
The risk we are all taking right now by having our economy shut down is that back at the farm, hard choices are coming. If I’m a dairy farmer and I can’t sell my milk, how long can I afford to continue to feed the cow and produce the milk with no ability to sell it? The answer isn’t months. Some dairy farms right now are losing $6+ per hundredweight of milk. For your average cow, that’s about $4.20 per day. On a 10,000 cow dairy, $42,000 per day. Herd sizes will have to be reduced if something doesn’t change.
In the field, thousands of acres of vegetables and fruits are not being planted or are being tilled up because there’s no one to buy the product from the farmer. Back to the potato example, french fry processors are cutting contract acres for the 2020 season by 20-25%. Those are huge cuts, and we won’t have a chance to replace those acres until 2021. Every crop has a different circumstance, but these types of cuts could result in food shortages in coming months. Are you prepared to go on a diet?
One comment I saw on a Wall Street Journal story the other day was startling. It said “So farmers cannot figure out how to place cheese from 10 pound bags to smaller bags? Cannot figure out how to process milk? Can’t figure out how to sell eggs by the side of the road?” I was shocked. As I scrolled down through the 450 posts, I saw that many people took similar views. Consider for a moment that paid subscribers of The Wall Street Journal tend to be well educated, urban, and probably are better off financially than most people. And yet many comments displayed complete ignorance about the food supply chain.
The current crisis will ultimately pass, and hopefully without too much suffering. As food issues rise to the top of people’s minds, I believe agriculture has a wonderful opportunity to educate people better about where our food comes from and how it gets to our tables while we pull out all the stops to get food to the places where it’s needed.
Chris Hunsaker
Co-Founder/CEO, Acuitus Ag
