Where the crops go

A framework for demand in agriculture

May 31, 2023

Hello and welcome to the sixth edition of Topsoil - a monthly newsletter with frameworks to help you make sense of agriculture, at just the right depth.

I had a great time chatting yield with Tim and Tyler from the Modern Acre podcast earlier this month - feel free to check it out!

Now, let’s dig in!

I often hear questions that go something like this:

“Why doesn’t every farmer go organic?” or

“Why do so many farmers only grow corn and soybeans?”

While answers may range from agronomic realities to operational choices, one underrated reason is quite simply: demand. Farmers must be able to sell the crops they grow, ideally for more than the cost to grow the crop, to keep the farm running.

Markets are where buyers and sellers meet and supply and demand intersect. Last time, we dug deep into the supply side of the equation with yield — how much is produced.

Today, we turn to the demand side of the equation. Where do all of the crops go? We’ll answer that question, explore who shapes demand and how, and look into some of the implications for agriculture more broadly.

Proximity matters for markets

There are many ways that a farmer can sell their crops, depending on what crops they grow and where their farms are located.

Most crop products are bulky, physical goods that are expensive to move through the three-dimensional world. Because of this, a farm’s proximity to points of sale, whether that is a local market, major rivers used to transport goods, or processing facilities can be a huge advantage and deciding factor on how the crops are marketed.

Case in point, Illinois is the number one state in producing pumpkins. It’s not because Illinoians have a penchant for pumpkin pie or have more Halloween spirit than the rest of the country. It’s because the company Libby is responsible for producing 80% of the world’s canned pumpkin. Libby’s canning facility is located in — you guessed it — Morton, Illinois. Farmers around Morton respond to the markets available to them by growing pumpkins.

The country in which a farm is located can also make an impact on what markets are available, since exports and trade are carefully negotiated between nations. While many of the market examples we’ll walk through below are from the US, the same principles may apply to markets in other countries too.

Growing demand takes a team

Farmers are often described as “price takers.” Individual farmers typically do not have large enough market share to influence the overall price of the crop. They take the price as given. At the same time, farmers have produced more over time. We know from Econ 101 that as supply goes up, price typically comes down.

To address these uncertainties around price, farmers work to grow existing markets and create new markets. Increasing demand allows farmers to sell their crops – ideally at a higher price.

The good news is that farmers are not on their own when it comes to expanding markets and increasing demand. There are several other stakeholders such as cooperatives, commodity groups, and the government that work together to achieve these goals.

A cooperative or “co-op” is a business structure that is member-owned (instead of shareholder-owned like a corporation). In the case of agricultural cooperatives, farmers are the member-owners who band together for a stronger negotiating position to buy inputs, manage infrastructure, and market their crops.

If you are familiar with “Got Milk?” or “Beef. It’s What’s For Dinner,” then you’ve experienced the fine work of commodity groups. As the name suggests, commodity groups (I’m lumping together Marketing Orders and Checkoff Programs here) like the National Peanut Board or the United Soybean Board are established to drive demand for individual commodities.

Farmers and processors can petition the USDA to create a commodity group. Once established, the USDA ensures that all farmers and processors of that commodity pay into the group each year based on how much crop they sell. This pool of funds often totals to millions of dollars per commodity group each year. Now, instead of each farmer being on the hook to single-handedly spark global demand for popcorn or pecans, commodity programs invest in research and promotion to benefit all farmers and processors of that commodity.

Beyond overseeing Checkoff Programs and Marketing Orders, the government also drives demand for agricultural products by purchasing commodities directly, funding consumers through nutrition programs, and brokering trade policy with other countries.

So how do these players – farmers, cooperatives, commodity groups, and the government – actually grow demand?

Accessing markets

When you hear farmers talk about marketing, particularly grain marketing, it’s not the Don-Draper-sitting-in-a-conference-room-spitballing-catchy-slogans kind of marketing. It is much more literally finding a buyer for their crops.

At an individual farm level, there are many actions a farmer may take to access markets. They can sell directly to consumers (a very small percentage do this, <5% in the US); shop around and form contracts with intermediaries like processors, distributors, or cooperatives; or trade into commodity futures markets.

By definition, commodities must be interchangeable – a bushel of soybeans is a bushel of soybeans, regardless of if you are in Missouri or Mato Grosso. Standards for each commodity are established so that buyers can rest assured that they know what they are getting.

One way that farmers can access markets is by meeting these standards or specifications. A non-cropping example: 98% of New Zealand lamb is exported. In order to ensure that the lamb can reach as broad a market as possible, all lamb in New Zealand is certified halal.

Growing existing markets

As we are about 12,000 years into this whole agricultural endeavor, there are many markets that already exist. To increase demand for their crops, farmers and other stakeholders work to expand these existing markets.

Good old advertising and promotion (like “Got Milk?”) is a tactic used by farmers, cooperatives, and commodity groups to increase demand for crop products, especially those products that consumers purchase, like dairy, pistachios or peanuts.

One of the roles of government is to develop trade policy to create a robust export market. This is especially critical for countries that are heavy agricultural exporters, like the US, the Netherlands and Brazil. In the US, where exports account for about 20% of agriculture sales, the USDA funds the Foreign Agricultural Service agency to develop markets and negotiate trade.

As global tensions have risen in recent years, countries are increasingly wielding tactics like tariffs and quotas to achieve other national interests. This unfortunately creates winners and losers, leaving the agricultural sector in some countries exposed while creating market opportunities for agriculture in other countries.

Beyond trade, the government increases demand through direct purchases and nutritional programs. The USDA purchases commodities directly each year to distribute to food banks, schools and other nutrition programs.

About 74% of the USDA’s budget is allocated towards nutrition programs, such as Supplemental Nutrition Assistance Program (SNAP) or WIC for Women, Infants, and Children. This funding grows the demand for farm products, or at least allows demand to be realized. For example, in 2021, the WIC program expanded funding for fruits and vegetables. This expansion has resulted in an additional $75 million of fruit and vegetable purchases across the US every month.

Creating new markets

One way to increase demand for a crop is to invent new products that use that crop as a key ingredient. When faced with high production levels and low demand, farmers exemplify the industriousness and creativity of the human spirit. I’m never not amazed at how humans can make lemonade (and shoe shine, and air freshener, and salad dressing, and and) from the proverbial lemons.

Take for example the thousands of new foods, beverages, cosmetics and other products that now use almonds as an ingredient. The Almond Board of California, the Marketing Order responsible for almonds, has invested significantly in research and development to successfully support the creation of new almond products like almond butters, almond milks and my favorite, new kinds of chocolate covered almonds.

Source: California Walnuts Annual Grower Meeting Presentation – 2018 (Mintel)

Beyond turning crops into other food products, biofuels are a hugely important example of demand creation. While biofuels have been in use since the late 1800’s, biofuels didn’t take off until the Renewable Fuel Standard in the US passed in 2005. The RFS mandated that a percentage of ethanol be blended into gasoline, creating massive demand for corn as the key ingredient. There is a lot of fascinating history here that Sarah Mock and the team at aei.ag explores in the Corn Saves America podcast if you are curious to dig deeper.

As carbon emissions from air travel are now in the spotlight (responsible for 7% of total transportation emissions) we may be on the verge of another big increase in demand for biofuels and the crops that are used to create them. As the technology to create Sustainable Aviation Fuel has matured over the past couple of years, new processing facilities are under construction as we speak.

Last but not least, there is a lot of innovation exploring how to use crop byproducts. For example, one of the outputs from the corn ethanol distilling process, dried distillers grain, is widely used as cattle feed. Almond hulls, the inedible-to-human exterior of almonds, also can be used as cattle bedding and feed.

Not just for human consumption

While there are many different ways that farmers can market their crops and have support to do so, how does this all look in practice?

Let’s take a look at the top two crops by acreage in the US, corn and soybeans. Collectively, corn and soy represent about 180 million planted acres (~45% of total cropland in US).

Source: USDA World Agricultural Supply and Demand Estimates May 12, 2023 for 2021 Market Year (Sep-Aug). Export quantities are estimated based on USDA Foreign Agricultural Service Corn 2021 Export Highlights; dried distillers grain estimated based on ~⅓ conversion; graphic made with SankeyMATIC.

From this chart, we can see that corn is a wildly versatile plant and that many, many markets have been created to consume the vast supplies of US corn. As a result, corn is inextricably tied to the demand for animal protein, the broader energy market, and geopolitics. Which is, uh, kind of a big deal.

Now let’s take a look at soybeans:

You can imagine that every single crop commodity in each country has its own unique flow chart like this based on the types of markets available and the downstream uses for that crop.

Consumer demand as a lever for change?

There is an assumption underlying the questions about why farmers grow what they grow. The assumption is that consumers can shape agriculture if they simply “vote with their forks” to create demand.

There are plenty of good reasons for individuals to be intentional about their food choices, from personal nutrition to the desire to keep dollars in their community. And very true, that when aggregated across enough individuals, markets respond to meet demand (just look at the number of new products that are marketed as “regenerative”!).

However, there’s a bit of a paradox here.

Because what we see from above is that for a large portion of the farmed land in the US and world, individual food choices are one small piece of a much bigger, mind-bogglingly complex puzzle. Hog herds in China and gas prices at the pump influence overall demand much more than whether you have corn flakes or avocado toast for breakfast.

Today, there are more demands than ever being placed on agriculture: to feed a growing population, to provide a more sustainable source of fuel, and to mitigate climate change among others. How have you seen demand evolve in your corner of agriculture?