How War in Iran Will Squeeze America's Farmers Even Further

23:57They just do. If you chart, I think the best way to do this is to chart gold against anything. And you can even pick some things that have maybe been hotter in the moment, like cocoa last year or cattle recently. And if you do a long-term chart of any basically price-taking, very elastic supply response commodity, they will fall over time. And if you plot it against gold, it's a stunning chart.

24:21Tracy Alloway:Yeah. To be fair, anything these days looks pretty bad relative to gold. But I certainly take the point, and to some extent, that is the definition of progress, right? That all of grains and proteins and stuff get cheaper over time as we become a wealthier society. But I certainly take that point. Talk to us about trade in the last year, because I can think of a few different dimensions. First of all, you always have the president talking about, oh, we're going to get a good deal for our soybean farmers. So I'm never quite sure where that is. Second of all, though, I imagine that, you know, especially certain just you mentioned equipment costs and tariffs on certain goods, I imagine has created a squeeze.

25:04Tracy Alloway:Talk to us about the last year and how changing trade patterns have affected the farmers that you work with. Yeah, so the first thing that hit us right, obviously, was the trade challenge with China, right? Largest buyer of soybeans in the world. And that obviously pushes supply back into the US. And the Brazilians actually get a different signal, economic signal, because prices actually rise in Brazil, right up underneath the tariff barrier, up right just below where the US value is. And so you get a signal into the Brazilian market to expand, actually. And the other thing I have a very concern about in that is, as we've worked through it, we have sold – the Chinese have bought just enough U.S.

25:48beans to keep the Brazilian honest. That's it. And that's it. Can you explain – sorry, can you clarify what that means? So what they do is because the Brazilians say, hey, you're not going to buy any U.S. beans, period, right? Their prices just keep going higher and higher and higher. Well, all of a sudden, I think the day that they did finally buy a few Brazilian cargos, I think the Brazilian beans probably lost a dollar a bushel. That U.S. cargo, you mentioned. Yeah, U.S. They bought U.S. cargos and it sends a signal so that the U.S., the Brazilian beans just can't get away too far away. The Chinese effectively have used us as a lever to keep that going.

26:25So you've got expansion, Brazil and, of course, Argentina under the new regime doing much better as far as, and you can see they had an all-time record wheat crop there. And so you've got two competitors that are doing relatively well. The other concern I have with this is, and trying not to be political, is back when we embargoed the Russians, it sent a signal to the world community that we were not a stable supplier. and he means the soviets uh in the oh yeah oh you're not talking about yeah i was confused

27:00Tracy Alloway:we're going to go way back good good let's good we love we love history on the podcast so wait talk to us more about the recent edition yeah all right yeah tell us yeah so when that happened right that caused a flood of capital to pour in to brazil okay and argentina right particularly the Japanese, which were the large buyer, global buyer in the global trade back then, but others poured money into infrastructure to get an alternative. And you would do the same thing, right? If you had one grocery store that was supplied and all of a sudden they said, you either do what I want or you'd go find a secondary supplier.

27:35And that is absolutely happening. Foreign capital is pouring into alternative markets. So it's a long-term challenge in what this trade dispute has done. That's my concern as a grower.

27:47Tracy Alloway:That history is repeating in the sense that the proximate, okay, there's a bunch of trade barriers, et cetera, going on. And so the move is internationally just invest more in non-American farms to expand that supply. And so you see more, say, Chinese investment in Brazil and Chinese investment elsewhere so that they just have alternate, various buyers have alternate sources outside of the U.S. Yeah, that is absolutely happening.

28:47trade restrictions and tariffs, but still overwhelmingly supporting a president who loves tariffs in his own words? Again, I can't speak for every farmer and there's a very wide, but I do think that in the previous administration, there were, I'll call them bridge payments, that generally made up a lot of that gap. A lot of that other pieces of the puzzle on taxes. We've had tremendous challenges with regulation in farming that was promised, whether that's particularly things around emissions, water regulation, some things that became very burdensome. And so there were a lot of reasons that not every farm, we have farms on both sides here, but a lot of farms did support the platform that Trump ran on in the previous election.

29:38There are a number of other things besides just the tariffs. They also have a sense of fair trade, access to markets. We import a lot of things from Canada, but we can't export a number of things to Canada. Milk is one of the dairy products, I think. We're focused on grain, but there are significant capital investments in this country and everything on the livestock and protein side out there also that we haven't even broached. And another example, the EU. Obviously, the EU has a protected grain market like no place on earth. So one thing I can say, if given the opportunity, 99 plus percent of real crop producers in the United States would love nothing more than to just remove all trade regulation or trade barriers, shall we say, tariffs or otherwise, to global grain production because they would do extremely well in an environment like that.

30:29Yeah. American farmers are playing to the rules. They didn't get to say at the rules, they'll play to the rules that they're given. But if you let them loose, they are tremendously productive. We have also the gifts that this country has with waterways, transportation, rule of law is very important, private property ownership rules, things that make the US, a little less the Canadian producer, extremely competitive in the world. ever more, we continue to get more and more governor intervention. And we've been through it before and we'll deal with it as it comes.

31:05Tracy Alloway:What about our labor costs a factor or is it mostly the type of crops that you deal with? Is it so mechanized that labor is just not a particularly important dial or factor of the cost? In that example, thousand dollar an acre costs, labor is a tiny amount of that in grain farming. It's become extremely efficient. But in all the crops that you think around vegetable farming, right, things that are very labor intense, it's absolutely an issue, right? And immigration, robotics, all that you see more and more, right, as labor costs rise. Yeah, it's a huge issue in certain crops. And quite frankly, crops that consumers are more familiar with day to day, right?

31:49A consumer doesn't eat a soybean or crunch on a hard piece of corn, right? But when it becomes strawberries, lettuce, carrots, right? It's still a very labor-intensive operation. And the livestock side is another good example, I think, where labor costs are squeezing and certainly hard of the immigration issue too.

32:09Tracy Alloway:My son likes raw corn, by the way. I guess he doesn't eat - Raw corn? Yeah, well, he does - Like directly off the cob? Yeah, yeah, he does just fresh corn pre-cooked. I mean, it's not the, not dried corn. Not dried corn. Sweet corn. Yeah, sweet corn. Sweet court. Okay. Yeah. All right. I know. That's very confused. He wouldn't want to bite into a fully cured 15 % moisture. Absolutely. He would not be today. But Tracy, I've probably told this story. Did I ever tell you about the time I talked to the palm oil magnate at the top, at the nightclub at the top of the Patronus Towers? I was at this really noisy nightclub at the top of the Patronus Towers in Kuala Lumpur.

32:46Tracy Alloway:And I met him there. Oh, you have? And there was this palm oil magnate. It was super loud in there. And he was like, Joe, let me tell you why palm oil is just the best business in the world. It goes into everything. It goes into women's lipstick. It goes into this. It goes into that. And this is like the key thing relevant. He's like, because of like the nature of the trees, at least as of the time, it was very difficult to mechanize. And so unlike, say, there was always going to be because labor is such an important part of picking palm oil. It's like Malaysia will always have this cost advantage over richer countries.

33:22Tracy Alloway:And so, yes, he was very. But now they're talking about mechanized ways. Yeah, I think I think they are making it more mechanized and robots will eventually come for it. But at least at the time, he was really giving me the hard sell on palm oil is the future. And yet you came back from your trip without having bought a palm oil farm. Yeah. Okay. So one of the things I wanted to ask is how farmers actually make the decision on what they're going to plant each year. I'm sure some of it is just based on their own experience and the type of land they have, but it also seems like there are all these other factors that they would be considering future prices that they could get for things or input costs, maybe certain crops, for instance, consume or need more nitrogen, which is now going up in price.

34:06So what are all the individual factors that go into making those decisions every year? Well, as the farmer of the group, I guess I'll have to take this one. So I'd say, obviously, economics. We do look at economics, although I think farmers tend to look a little bit more backward than forward, because you really don't know until you have yield, right? And so fundamentally, you can only take forward-looking economics so far. Crop rotation is very important, disease-breaking, equipment utilization, storage utilization, And it also depends in the, you know, what are your choices? Certain parts of the country have a lot more choices.

34:43We've kind of left out. Cotton has been severely depressed. Cotton is a very flexible crop in a sense that you could replace that with the soybean, potentially a little bit of corn. Peanuts is a big crop in the Southeast, highly government regulated. So what you switch to crop insurance is a huge piece of the puzzle. What levels can you insure? You may grow a crop that doesn't look profitable, but because of the levels, you can guarantee revenue those things got. But you don't get tremendous switches in most places because you just, if you go all corn, we saw a lot more corn last year, actually, you can suddenly find yourself in a severe storage problem because you trade a 50 bushel an acre soybean for a 200 bushel an acre.

35:27corn. And you actually have that in the far west. Even as we speak, there is grain piled across Minnesota, North Dakota, South Dakota, Nebraska, because we had a lot more corn on corn acres, rotation, and we outran our storage. And we had a great crop. So this is something else I wanted to ask about, which is like the decision to put something in storage and then when you actually decide to sell it, because this is, again, one thing I hadn't really realized was such a thing in the U.S. until I read that book. But also it seems to be relevant again today because we are seeing grain prices start to go up a little bit given the Iran situation.

36:09And so I'm reading stories on Ag Week and places like that saying that farmers are all rushing to sell all the corn that they had in storage from last year. Corn really moves or grain really moves for two main reasons in terms of having to move. as Jeff already alluded to, storage is one and cash needs is the other. And the real value of storage space in North America is that first sort of 90 days into harvest and afterwards. After that, it becomes, again, more of a personal decision, a personal marketing decision. There's an approach we teach that forces producers to think more an actual grain merchandising and risk management group, like the group we worked for in the past would think.

36:52So there are actual drivers for that. Economic drivers might change than the way they did it before. But yes, flat prices that are better are just that, and it will bring grain to market, especially when we were seeing prices we haven't seen for quite some time. And as Jeff said, we had a really good crop and a lot still sitting around. So yeah, in the last month, a tremendous amount of physical grain has moved to hit these higher prices.

37:31Tracy Alloway:who makes a lot of money when there's a ton of supply and everyone wants storage do those storage rents go way up at that time yeah it's a that's a great question farmers ask us that all the time so yes space gets more valuable right up to a point and then that point you know keeps the value of space keeps rising until it grabs an incremental space. And the next thing, you know, the easy space gets filled first, and then space value gets higher. And then the next thing, you know, you're filling a salt mine somewhere. And then you get out to the far west where you have colder, drier, they actually pile the grain and cover it millions and millions and millions of bushels, which kind of caps out the value of space.

38:11So that really starts to set that value of space. But yes, it does flex over time. And now farmers have invested in a lot of space. And one of the things we teach is how to utilize that space, like a grain elevator and how to earn like a merchandiser. That's a piece, a big piece of what we do in our farmer producer business.

38:30Tracy Alloway:Interesting. So I'm zooming out for a second. I am looking at a chart from the American Farm Bureau Federation. 2025 was a very high year for farm bankruptcies overall. And we're, you know, it's not at the levels of like when they were doing the farm aid concerts in the 1980s or so forth. but it's clearly ticked up the highest it looks like certainly since the pandemic. When a farmer declares bankruptcy, how did they wind up in that situation? I mean, everyone's facing the same stresses, but what had to have happened to kick off that sequence of events such that a farmer files Chapter 12? Yeah, in our farm management practice, which is a part of this business, we see a lot.

39:11So let's be, first off, you got to dig deeper in those numbers. I would venture to guess that the dairy numbers are in there and we have a structural change in dairy to these mega dairy efficiencies that have that business model has taken over. And so it's put intense pressure on even the midsize dairy farm. So you've got a lot of that. And that's, that's a very emotional type of farming. I want to say, because you're there every day with that livestock. It's hard to explain to somebody who hasn't been with an animal since it was born and is with it for seven or eight years. To get forced out that way is really challenging.

39:52We don't see it in the grain side. A lot of it has to do with the payments. It's been tight and you're watching working capital and farms are different, but we don't see a lot of chapter 12. You don't see it. We're not seeing farms being forced to sale. We're not seeing seen wholesale equipment sales that are bankruptcy driven in the grain side. In most markets, I think rice has been particularly difficult. We're not huge into that kind of Arkansas area. I think cotton has been very, very challenging. We really haven't seen a credit contraction, right? Which is what you would think would happen from working capital.

40:28A lot of working capital is provided through the farm credit system, right? The quasi-backed agencies. And we have very rarely, even in the last cycle, because they're renewing their operating loans here in the last couple of months, there has been a very few pullbacks. And then quite frankly, it's still very competitive where you can borrow money at, call it six and a half to seven and a half percent for short term versus a government treasury at three and a half, 3.6. So as investors, right, that's a good spread. and there still is a lot of equity in farms, it's in the land. So you can get farms that get tripped up through expansion and you have equity, but it's locked through into the land values.

41:11And that's, that can be where you get into trouble. You just get short-term operating capital squeezed, but the banks are not to the best of what we see are not really heavily pulling back on operating notes at this point. Yeah. It goes back to the land point that we made earlier and equity. And when you compare now to the farm aid stuff in the late 80s, we have much better balance sheets at the producer level now versus then. And also remember, you had interest rates in the upper teens, right? So it's just very different now. Obviously, there's a squeeze, but it's not remotely like that. So I realize we're already running out of time and we could kind of keep going for ages.

41:50But But just to get back to the current situation, what are you hearing from your network of farming contacts right now about how they're feeling about the Iran situation? Because as we mentioned in the intro, there are these push-pull factors that are going on right now. Yeah, as we connect with the farmers and my own farm, first off, we've had some opportunities to hedge off some grain for new crop at some relatively interesting levels. And lots of our clients have taken the time to at least get some grain sold. So you forward sold the upcoming crop? We can forward sell the upcoming crop. We've taken advantage of it on the old crop, right, which we talked about a little bit earlier.

42:29We obviously are very concerned about the fertilizer prices on the pieces we don't have locked up. And, you know, in that constant squeeze across all inflationary, I think the inflation is the piece that drives us. I'm going to call us being the proverbial us because we don't feel like we're in control. A number of suppliers in the ag sector operate in oligarchy, oligopoly, right? And so you'll hear a lot about whether that's seed, fertilizer, particularly in cattle processing. And that's a big issue. We're very aware of it. When you put in trade barriers, you actually isolate other competitors out, right?

43:11That are probably critical to keeping costs down at the farm. So farmers feel very threatened about the supplier environment that they're in, and probably with good reason. I've never seen anything personally illegal go on, but I see lots of behavior that is legal to operate in that oligopoly environment. And so it's really disconcerting if you think about running a business where your suppliers There's three, maybe four seed companies left genetics. You're processing the cattle, which by the way, at least on the calf side, it's an all-time record profits, but they're still concerned because you only have realistically three or four buyers.

43:51Hogs are highly consolidated. Chicken's very consolidated. Fertilizer. So that's probably one of the angst we have. Policy is another big piece of the angst because we're, I think, without these payments, we don't know whether those are going to come or not. That's floated a lot of farms in the last year. And so that's very disconcerting because you could change administration to administration. You can't hedge that or know what the numbers are going to look like. Lots of uncertainty.

44:17Tracy Alloway:I bet. Do you have one piece of advice for your client? Like right now in this environment, like, okay, that's what they're telling you. What are you telling them to do right now? Well, one thing, as we already talked about, is look at these gift horses in a good way and hedge a little bit off for next year. Because we are at new crop levels. We describe new crop as next fall in trader language at numbers that we haven't seen for a while. So let's go ahead and take advantage of that and see what happens. As you folks probably very well know, crude and corn are incredibly correlated. I think they have an R squared north of 95.

44:54With some of our very tight relationships, we're having producers sit in their easy chair on Sunday nights when the overnights open after a weekend of crazy news and everyone's doom scrolling. And crude's up 20 and corn's up 20 cents following it. Maybe if you only have a little bit hedged for next year, go into your account and hedge a little more. So we've been taking advantage of some of these wild market swings often at weird times. For whatever reason, the last couple of Sunday nights have been absolutely wild. yeah so uh just pay a little bit more attention and win these little battles along the way we refer to as winning the details take advantage of those things while you can yeah i think uh what we teach in class right is around discipline right the discipline and hearts of really good so understanding your actual risk managing that risk off best is your risk profile staying steady right things that people who trade commodities for a living do and understand and then there are huge amounts of physical details around cash management and storage and things like that that are still out there.

45:55So that's really where we bring out the disciplined approach around this and becoming risk managers. We always, one of the first things we say is that if you want to make a jump as a producer, you become a risk manager to the farm instead of a speculator. And that's how the biggest companies, right, they have risk managers, whether they're commodity companies or people who use a lot of commodities, right? They have people that risk manage and they focus on margin. And so we've really tried to bring that discipline through our classes and through our one-on-one relationships out to the farm, which never had access to this type of education.

46:30That's where our business came in, disciplined thought process that their buyers use. If you look at all the companies that have been around forever in the commodity side, they're all hyper-disciplined. They all share the same culture and approaches and they're hedgers. and we try to have that mindset bleed into the practice of our students and clients. All right, Jeff and Mike, thank you once again for coming back on All Thoughts. Truly the perfect guest at the perfect time. So really appreciate it. Yeah, thanks for having us. Appreciate it.

47:00Tracy Alloway:It's fun to hear that, you know, we're in our New York City apartments, like doom scrolling Sunday night futures, and we're all doing the same thing. The farmers out in the middle of the country and those of us, we're all looking at that open. But thank you so much. That was a blast. You bet.

47:27So, Joe, that was really, really interesting. And I feel like even though we spoke for quite a while, we've still only scratched the surface. It's a big topic, right? But one of the things that stood out there was the importance of land.

47:39Tracy Alloway:Yes. land costs and also competition from abroad, because I hadn't really thought about that before. We are used to hearing the phrase that buy land. They're not making any more of it. But if you're deforesting Brazil or Indonesia, it turns out you are making more farmland. No, I thought that was a great point. There's been a lot of interesting reporting, including from our Bloomberg colleagues, about specifically Chinese agriculture investments in Brazil and how much they're building up that linkages. And so obviously still today, as they put it, Trump tries to make some soybean sales and the American farmer sort of has it.

48:19Tracy Alloway:They can play each other off, discipline the Brazilian farmer by buying some American beans, et cetera. But there is this really big farm ecosystem that continues to grow, also continues to get very productive. They're using some of the top of the line Chinese equipment, which we know is very good. And yeah, that's going to continue to undercut the American exporter. Do you think the farming evolution and the productivity revolution is going to be a good analogy for AI for everyone else, for the white collar working class? You know, it's I don't know, probably not, but it is interesting. There was actually something out literally today.

48:54Tracy Alloway:I think some hedge fund put a thing like trying to push back some of the doom scenarios. And they're like, oh, you know, we used to be so much agriculture based. Then it went away, but now we have other jobs, et cetera. But that was like one sector. Yeah. You know, like I'm not very like I'm not very comforted by any historical analogy where the technology just applies to one sector. Like, oh, like bank tellers didn't disappear after the ATM was introduced. There was one technology. Right. And we're talking about the whole knowledge economy. We're talking about like the entire the human brain being replicated.

49:27Tracy Alloway:So I'm not. No, I'm not that. I don't take too much comfort from that. All right. It's bad. And it's tough for farmers. Yes. No, that's my point. My point is that the experience of small scale farmers could be coming to all of us because it's just going to be about scale and capital investment and how big your tractor is. I know. All right. Shall we leave it there? Let's leave it there. This has been another episode of the All Thoughts podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway. And I'm Jill Weisenthal. You can follow me at The Stalwart. Follow Mike and Jeff. They're at Agris Academy.

49:59Tracy Alloway:me. Follow our producers, Kerman Rodriguez at Kerman Armand, Dashiell Bennett at Dashbot, and Kale Brooks at Kale Brooks. And for more OddLots content, go to Bloomberg.com slash OddLots. We have a daily newsletter on all of our episodes. And you can chat about all these topics 24-7 in our Discord, discord.gg slash OddLots. And if you enjoy OddLots, if you like it when we do these agricultural episodes, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad-free. All you need to do is find the Bloomberg channel on Apple Podcasts and follow the instructions there.

50:34Thanks for listening.

50:58Thank you.