The rain in the Midwest has simply destroyed thousands of acres of prime farmland and it will be months before we will really know the true impact. Now the situation maybe getting even worse as levees burst and the towns and farms near the Mississippi get hit. Forecasts for the region are not good at all and as the water rises so are fears that 2008 could be one of the worst harvests on record.

Water Knee High By July

Corn will most certainly not be “Knee High By July” the water level sure will be though at this rate. Farmers face a massive clean up and then as we get into July and high degree heating days then those corn crops that didn’t get washed away will still have to survive the intense heat, it’s likely going to be disaster part II. At the end of the day the scenario is easy to figure out. Corn prices will surge along with soybeans, bean oil, bean meal etc. Consumers will be faced with even tighter supplies and much higher prices for everything form milk and dairy to chicken and cattle and everything in between. Time to start a vegetable garden. I recently wrote about this situation for my friends at the Daily Reckoning, take a read.

By the way, if you can tell me what fruit this is that I had in my hotel in Dubai a few weeks ago I will give you a prize.

The Daily Reckoning PRESENTS: The days of the 3,000-mile Caesar salad are coming to an end. With diesel prices at record highs, Americans just can’t afford to get their food from all over the country. Something has to change – and soon. Kevin Kerr explores…

INVASION OF THE LOCAVORES
by Kevin Kerr

As you know, Byron and I travel near and far to find the most cutting-edge information on everything from energy and metals to agriculture and emerging markets. We have found that seeing something for oneself is truly the best way to judge what may be the next great investment opportunity.

After all, the guy sitting behind a desk on Park Avenue almost certainly has no idea what is really going on with farmers and what is going on in their heads this year.

I know what is going on inside the heads of the farmers. This spring, I went to visit farms in the Midwest, as I do every year.

It was a Saturday in mid-April when I pulled up to the Miller Armstrong Building in the sleepy farm town of Waseca, Minn. Waseca is also home to a federal penitentiary and Jeff Skilling, former Enron CEO and allegedly one of the “smartest guys in the room.” Now he is a convicted felon, serving time.

I drove into town and watched the cattle grazing outside the prison. I wondered for a moment if those cows knew they had a famous neighbor. They didn’t seem to care. The cows seemed more concerned about where to find some food. It was certainly foreshadowing what I was about to hear from the farmers.

I was greeted by my friend and Outstanding Investments member Geb Singlestad. Geb escorted me to a casual meeting at the Armstrong hall building. Charlie Nedoss of Peak Trading and about 15 other farmers accompanied me. One reporter showed up. Everyone introduced themselves, and we all grabbed some coffee. I spoke with the reporter for a few minutes, and the meeting began.

The thing about small-town America is everyone is friendly, but cautious. Geb invited all these farmers to the meeting. Later on, we learned that most of them thought we were there to sell them something… We were not.

Most of the farmers showed up out of respect for Geb, because he is a sort of patriarch in the community. The meeting was scheduled to last about 45 minutes, but once it got going, we covered so much ground and there were so many questions that we ended up being there for 2½ hours.

The questions came fast and furious. One farmer asked, “Do these people in Washington or in the cities know how much we are paying for our input costs? Do they have any clue how much the farmer is being squeezed?”

The best question of all, in my opinion, was asked a few times. “What will it take? How high will prices have to go to get people to change?”

I said that I think prices will have to go much, much higher before urbanites even consider switching off American Idol and protesting in the street. The farmers realize that most people in the country have no idea about either the process or the cost of what it takes to get their dinner from field to fork.

One farmer belted out, “As long as they have groceries on the shelves, lights on, the ATMs working and their jobs, then all is well. They don’t have a clue.”

There has always been a line between city and suburb dwellers and their rural counterparts. Most people in urban areas have little understanding of how much work goes into generating our food supply and then transporting it to each and every city.

Just the volume of diesel fuel usage to grow the crops is astounding. Agriculture is a very fuel-intensive undertaking. With diesel prices topping $4 and rising, the costs continue to climb at the grocery store.

After our meeting with the farmers, Geb took Charlie and me to see the newest ethanol plant being built in Janesville, Minn. This new structure is a 110 million-gallon ethanol plant. It has several rail lines being built to run directly into the plant. The outside of the building itself is huge. The towering cranes were working full tilt while we were there, and the parking lot was full of workers’ cars. The one thing that neither Charlie nor I saw was a water supply. An ethanol plant uses a huge amount of water, so where will it come from?

It seems with ethanol, as with so many things, the answer from the government often comes after a major project is already well under way. For the last eight years, the Bush administration has seemed to be more likely to do first and fix later. What’s the old saying? “Better to ask for forgiveness than permission.”

Anyway, the ethanol plant has provided many good jobs in the area and is slated to produce a real boom for the local economy. That’s all well and good, but is it sustainable?

In his book The Long Emergency , James Howard Kunstler discusses the 3,000-mile Caesar salad. He discusses how we all have become used to getting our food from all points of the country and world, and how that will need to change. The farmers whom I met with feel the same way.

The days of being able to transport produce and grains across the country are facing such high costs from diesel that it will put them out of reach for many consumers. Sure, people in America are not starving. At least, not yet. But what they are doing is donating less to food banks, and feeding their children watered-down soup and soda, instead of milk.

With egg prices surging 26% and milk prices near record levels, consumers are making very difficult choices. My own aunt leaned into me at dinner recently and said, “Ya know, I bought a container of whipping cream and it was $7. That’s crazy.” Yes, it is crazy, and the even more insane thing is that prices may well have much further to go.

The farmers I met with are struggling with some of the highest input costs they have ever faced, and for some, it means that with all the massive expenses of running a farm, their margins are shrinking fast. Most of the farmers wondered what I think would happen if food stopped showing up on shelves in the city and the power went out and the ATMs shut down. You know what would happen? Panic.

The divide between the food source and the end-users is wide. As costs continue to skyrocket, we better begin to appreciate and support our farmers, because the long emergency is here and time is running out.

As I said my goodbyes to the farmers, Scott walked with me on his farm and showed me all his new farm equipment. One tractor, a John Deere, looked brand-new. He told me that Deere simply has no equipment in stock, because sales are so red-hot. He said it’s much the same for Caterpillar and others. So even as the farmers complain about higher input costs and consumers in the cities complain about higher food costs, the beat goes on.

The solutions are not at all clear, but it is obvious that we need to begin to think locally. Food sources will need to be closer to the final consumers. The old way is simply not sustainable anymore.

In the brave new world, we will all likely have to become “locavores.” A locavore is someone who eats food grown locally. That would be a major shift difficult for most of us to fathom. But like it or not, it’s a change that is not going to be a choice. It will happen regardless of how much we fight it. Really, the question is how high of prices are we willing to pay in the meantime.

Regards,

Kevin Kerr
for The Daily Reckoning

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