Big problems require big solutions
By Mark Edelman and Barry Flinchbaugh
© Copyright Agri-Pulse Communications, Inc.
ME. Professor, I'm dedicating this column to a couple of stellar agricultural leaders who passed from our midst in the last couple of months: Ralph Hofstad, former President and CEO of Land O'Lakes based in Arden Hills Minnesota, and Claire Sandness, former LOL Board Chair from LaMoure, North Dakota. As a young ag economist from South Dakota State University, I watched these leaders in action as a Land O'Lakes Advisory Board Member. It was an amazing learning opportunity. LOL has become one of the largest regional farm cooperatives and a Fortune 200 food company. I served from 1985 to 1989, which was in the middle of the Farm Crisis.
BF. I remember Hofstad and Sandness. They were both gems. I also recall the Farm Crisis. Like most agribusinesses of the day, LOL went through the wringer from annual earnings of $30 million down to $3 million and back to $30 million again. They all felt the ripple effect of the farm crisis. LOL is a survivor and today it has 10,000 employees, does business in all 50 states and 60 countries, and has annual net earnings well in excess of a $100 million.
ME. Today's success is built on a foundation created by those who came before. Hofstad came to LOL after helping engineer a merger with the former FELCO Coop in 1970. FELCO was based in Fort Dodge, IA and Hofstad was the President. When I was on the Board in the 1980s, LOL was involved in a dozen consolidation discussions with the likes of Farmland Industries, Cenex, MidAM Dairy Coop, Midland Dairy Coop, and others. Hofstad used to say, “Big problems require big solutions.” While some merger talks didn't bear fruit, others did. Extraordinary times called for extraordinary actions to assure bottom line earnings. Hofstad and Sandness were good speakers and visionary leaders who were always making things happen and driving the industry toward greater returns for farmers and coop members.
BF. No dispute here. Great companies are built on foundations provided by those who came before. Many Coops like LOL were created during the Ag Depression of the 1920s and 30s. There were difficulties in access to farm supplies and marketing farm products at reasonable prices. Leaders stepped up to ask “Why can't we create a better way?” Then they made the connections and organized a new way of doing business.
ME. Today, agriculture faces a different set of challenges: climate change, international terrorism, and a more confrontational policy-making process. Agriculture enjoyed record incomes the past few years. Farmland values tripled in my state. Policy decisions made a decade ago led to current outcomes. We decided as a nation that we were addicted to oil imports. There was 9/11, international terrorism, and homeland security concerns. Agriculture began responding by producing renewable fuels and energy in addition to food and fiber. This helped to address domestic energy demands and national security concerns. Now this past month, we saw the opening of two new cellulosic ethanol ventures in Iowa. A third is not far behind. Big problems require big solutions. The plants represent the next steps in future global solutions and an inkling of new technologies to come. In the future, more big climate change technology solutions are needed to recycle CO2 and other greenhouse gases to produce “green gasoline and diesel.”
BF. It took significant policy-development initiatives, investments in research, and Herculean efforts in commercialization to get to this point with renewable energy from agriculture. It has been five years overdue. During the same period, expansion of hydraulic fracturing and horizontal drilling technologies contributed to a dramatic expansion of domestic oil and gas reserves. Oil imports are down to less than 35 percent of domestic oil consumption and less than 15 percent of our oil consumption comes from the Middle East. In the future, the U.S. may become a net oil exporter. Currently, big oil and big biofuel interests are at odds over their shares of domestic fuel demand as embodied in the Renewable Fuel Standard (RFS). After record high prices in recent years, corn prices are falling below support levels, due to an expected record crop. Food vs fuel has been replaced by a potential return of government payments with corn prices falling below trigger levels for first time in years. If the EPA gives in to Big Oil and cuts the RFS too much, farm program payments to farmers will increase even more as a result in the future.
ME. Now is not the time to cut or capitulate on the RFS. While domestic gasoline demand has been shrinking in recent years-which no one expected-this was partly due to recession. The economy is now growing, total gasoline demand expectations have begun to rise once again--even though cars are becoming more efficient. We need to continue the “all of the above” energy policy. Do we want next generation of biofuel technologies to be developed elsewhere after huge efforts were made to development them here first? No. Jobs will go where the investment goes. Has the global terrorism threat gone away? No. As the standard of living increases in low-income countries, people demand more energy and eat “higher on the hog" The nine billion global population prediction by 2040 not only means a 25 percent increase in food demand, it also means a 25 percent increase in energy demand if the standard of living is to remain the same. If we want the standard of living to increase, that means even more food and energy.
BF. The big reasons why we are facing terrorism in the Middle East include the historic rub of global oil demand, exploitation of large oil reserves in the area, and distribution of revenues to multiple cultures not tolerant of each other. Add to the global mix, Putin's riff with the Ukraine, U.S. and rest of Europe. One can easily foresee a need to ramp up U.S. oil and gas exports to sustain the economies of important allies in Europe and the rest of the world. What if the Islamic State spreads war to the rest of the Middle East at the same time Russian oil and gas supplies are shut off for Europe and shifted to China? In such geopolitical discussions, there is not much mention of climate change. National and global security trump environmental concerns in the short run.
* Edelman is a professor of economics at Iowa State University and Flinchbaugh is an emeritus professor of agricultural economics at Kansas State University
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