Crude Oil, demand and what this means for agriculture!

Published on: 16:08PM Jul 01, 2008
I just heard a new phrase in reference to crude oil, it is in a “demand destruction phrase”.  Everybody is talking about the Energy Information Administration International Energy Outlook 2008 report released last week (please note that we sent it out to all our internet clients and it is at our web site).  The highlight stated: “World market energy consumption is projected to increase by 50% (yes, that’s doubling demand from 2005 through 2030). Total energy demand in the non-OEC countries increased by 85%, compared with an increase of 19% in the OECD countries.
Implications: Even if the U.S. becomes very aggressive on conservation, the demand explosion in Asia is going to keep prices high for energy, which is where the term demand destruction comes into play. As a nation that consumes 25% or higher of the world energy supply, there are many in the world that would now suggest this is unfair and must be changed. If we don’t watch out, the standard of living in the U.S. is going to go on a multiple year decline! This I believe is the overriding No. 1 issue for this year’s election. If you don’t have a strong economy that creates jobs, you can’t hope to improve the lives of your citizens. It’s simple, no money, no play!
In regards to agriculture, this energy outlook must be considered positive to the ethanol production sector. If you combine this with world population growth it does suggest the demand outlook for agriculture is very bullish. My belief follows the following line of thinking. You only have demand if people can afford to pay for it. This is going to be the future problem for all world governments as energy costs go up, it’s a hidden tax on consumers disposable income. Eventually, it will lead to slower growth. If you dove tail this with a restrictive energy policy and higher taxes to pay for government transfer programs from the rich to the poor you set up a dangerous economic future for slower growth in income by rising cost. In the end you will move into a serious stagflation or worse we could be heading towards a economic downturn not seen since the early 30’s. Eventually, if the problem is not resolved I believe it will lead to a major military conflict over natural resources.
What to do?  I would suggest as a grain producer you need to be using the current incomes to help pay off debt rather than increase debt to avoid taxes.  Second, you need to focus on locking in the profit margins specifically for 2009 and 2010. Third, the most challenging, is we need to start rethinking how we produce our crops. The agricultural revolution of the 19th century and 20th century  has been based upon cheap oil. This is not the future we have in store for us,  which implies that every part of operations must be reviewed. Just because this is how we’ve done it in the past, there is no reason we must do it in the future. Today I’m asking questions. I will be looking forward to your comments in the future. I will try to react and even introduce in my daily comments as time permits.
Finally, this is our last comments prior to the 4th of July. Everybody here at UMS invites you to go out and celebrate the freedoms we have been given. Yes things are going to get rough ahead of us for the U.S. consumer but we must still recognize we are a lot better off than many other parts of the world.  Only by working together can we hope to improve our lot in life.
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