The Link Between Corn Futures and Water Futures
Ceres has done it again. With the release of “Water & Climate Risks Facing U.S. Corn Production: How Companies & Investors Can Cultivate Sustainability” the team of Boston braniacs moved the agricultural sustainability conversation forward by a giant step, and without ever asking, “Mother, may I?” For more than 25 years, Ceres has been bringing capitalists and environmentalists together with the understanding that environmental sustainability and financial sustainability go hand-in-hand.
In this report, released in mid-June, Water Program Director Brooke Barton and agribusiness consultant Sarah Elizabeth Clark highlight the importance of corn to the U.S. economy and to our ability to feed a growing population, then proceed to point out the growing risks that corn production faces given current agricultural practices. Putting all of this in the context of the U.S. corn value chain and the outsized role that corn plays in the U.S. economy, the authors’ goal is to draw attention to the need for more sustainable environmental practices that will, in turn, bring greater stability in the corn-related financial markets. While the report’s primary audience is likely the large investors whose capital is put at risk by short-sighted practices, there is much fodder for the water sector in this meaty (corn-fed?) report.
Just about every paragraph in this report has quotable statistics. Using my blogger’s prerogative, I’m going to lift out a few of my favorite nuggets for amplification:
- A lot of things come in thirds: The U.S. produces about a third (36%) of the global corn supply, corn makes up about a third (31%) of U.S. crop acreage, and U.S. corn supply is used in three roughly equal sectors: animal feed (38%), ethanol (35%) and everything else (27%). The last of these categories includes food ingredients (10%) and exports (10%), and the mysterious application called “stocks” (7%) (pp. 14, 15, 19).
- While annual average corn prices have gone up considerably over the last 10 years, driven primarily by global dietary changes and U.S. renewable fuel standards that create demand for ethanol, the daily price volatility has also increased, making it harder for procurement managers to stay within budget. This was especially true in 2012 when a major drought caused swift changes in corn prices and the price of corn futures (pp. 20-21).
- Federal crop insurance may be enabling risky behavior on the part of corn growers, thus postponing implementation of well-established practices, such as cover-cropping, that can help retain soil moisture. In recent years corn losses have been driving up the total payouts from the Federal Crop Insurance Program (pp. 26 & 31).
- While corn irrigation has become more efficient, increasing by 46% on a per bushel basis over a 25-year period, the total volume of water used for corn irrigation has grown considerably over that same period. More alarming, however, is that 87% of the irrigated corn production is in areas of high water stress. Not surprisingly, concentrations of this activity occur in Nebraska and Kansas, but California, Colorado, and Texas are also included. In California’s case, its 1.8 million dairy cows require corn silage, which in turn relies on irrigation. Because of the timing of the report, it does not include data from the drought that much of the West has been experiencing this winter and spring. Anecdotal conversations that I’ve had with colleagues in Nebraska and Montana indicate that much of the beef industry, at least, is starting to shift north in response to prolongued drought (pp. 35 & 37). I presume it’s having an impact on corn and dairy as well.
- As groundwater tables drop, pumping requires more energy, which means more money and, without renewable power, more greenhouse gas emissions. The report states that in western Kansas these energy costs have been as high as 10% of the total cost of growing corn (p. 36). Again anecdotally, I was told that portions of Nebraska experienced brown-outs during the 2012 drought because of the energy demanded by center-pivot irrigation for the region’s corn crop.
- Corn has the highest application rates of nitrogen fertilizers of any major U.S. crop, as well as more phosphate and potash than most crops. In 2010 U.S. corn production received 19.1 billion pounds of commercial fertilizer, which is more than half (54%) of all fertilizer applied to U.S. crops (though I think this doesn’t account for on-farm fertilizers such as manure). More than half of the nitrogen pollution that enters the Gulf of Mexico and fuels the dead zone comes from runoff from corn fields (pp. 45-47). (I’m sure the frustrating irony is not lost on you, the reader: We want to grow more corn so we can feed more people, so we apply more fertilizer which pollutes the water that kills the fish that should be feeding the people. So we grow more corn and apply more fertilizer ….)
- Largely through nitrogen fertilizers, corn contributes to U.S. greenhouse gas emissions. Agriculture makes up 8% of total U.S. GHG emissions, and of that, 56% is attributed to nitrous oxide, an extremely potent GHG. Corn, in turn, accounts for approximately one-third (35%) of the nitrous oxide emissions. Mulitplied together, nitrous oxide emissions from corn production represent 1.5% of total U.S. GHG emissions. That’s a lot for something that looks “green” to most people.
Naturally, the authors make recommendations that growers and the federal government can make changes to reduce risk, but the bulk of the advice is crafted for the companies that play a role in the corn value chain, and investors who hope to hitch their futures on those companies. But there is fodder in this report for all. Even if one only has time to skim the maps and graphics, I highly recommend this to anyone who cares about water, food, energy or investing, which, last I checked, is pretty much everybody.