Todd's Take

Last week's Todd's Take described some new innovations being pursued, any one of which could have the potential to bring about big changes in farming and the fuels producers depend on. (In case you missed it, see https://www.dtnpf.com/….)

At this point, it is difficult to say which, if any, will actually pan out. Using nitrogen-fixing microbes as a way of cutting back on fertilizer use seems like an easy product to test on a small scale before making a big commitment. We should know a lot more in a few years about just how effective these products might become.

Producing ammonia from wind energy is an idea that looks promising in areas far from the Mississippi River where transportation costs for fertilizer add to already expensive prices. There is still plenty to learn, and significant production appears several years off. It is not clear if wind production could or should produce all of the country's fertilizer needs, but if proved out, it could provide a much-needed, decentralized source of competition for today's limited ammonia fertilizer production in the U.S.

The transformation of the ag industry from relying on petroleum fuel sources to a candidate like hydrogen has big potential but is a monumental task, still in its infancy. A project this large will require consistent, multiterm commitment from both political parties -- a tall order to fill. Large investments being made in hydrogen are also gaining worldwide interest.

On Tuesday, Dec. 27, Reuters reported India will invest $2 billion to develop hydrogen and green ammonia (https://www.reuters.com/…). In addition to environmental benefits, hydrogen also offers India a way to be less dependent on Russia and Saudi Arabia for oil. Hydrogen fuel could very well be a part of the ag future someday, but the question is when?

The final innovation discussed last week described research at the University of Nebraska-Lincoln (UNL), seeking to develop genetic traits in corn that would significantly reduce the need for water and fertilizer. Given the inevitable math of population growth on a finite planet, genetic engineering offers more promise for the production of feed and food than any other approach.

For Midwestern farmers that have been blessed with some of the best soil on the planet, new crops designed to thrive in difficult conditions may sound like a possible threat, but consider two points: First, the likelihood of engineered corn as described above is probably years away from being commercially available. Second, the devil will be in the details; actual products often fall short of initial promises, and Midwestern farms may still hold significant yield advantages, even with a new seed. Let's see what researchers learn before hitting the panic button.

Thoughts of investing in innovative ideas can be alluring, but there is a Warren Buffett story worth listening to, described in the biography, "The Snowball: Warren Buffett and the Business of Life" by Alice Schroeder. In chapter 2, Ms. Schroeder describes a time in 1999 when Buffett was invited to speak to a gathering of media celebrities and elites in Sun Valley. At the time, internet stocks were the hot new item, and many tech gurus were in the audience.

Buffett's Berkshire Hathaway stock had lagged the internet boom, and it was widely known Buffett's policy of avoiding technology stocks had left him out of the popular group. Buffett was asked to speak to the gathering and seized the opportunity to mention an earlier time of great innovation. The excerpt below is from Ms. Schroeder's account of Buffett's talk:

"There were 2,000 auto companies, the most important invention probably, of the first half of the 20th century. It had an enormous impact on people's lives. If you had seen at the time of the first cars how this country would develop in connection with autos, you would have said, 'This is the place I must be.' But of the 2,000 companies, as of a few years ago, only three car companies survived ... So autos had an enormous impact on America, but in the opposite direction of investors."

As Buffett pointed out, it is easy to get excited about the shiny new toys of promising new ideas. However, we shouldn't assume investing in world-changing ideas is the path to easy riches. True innovation can be a long grind of trial and error. American inventor Thomas Edison was known for saying he found 10,000 ways that will not work (see https://www.smithsonianmag.com/…).

As we know now, Berkshire Hathaway is still going strong, and many of the hot internet companies of 1999 didn't make it. Everyone knows Amazon and Google, much like we know Ford and General Motors, but many of the stars of 1999 have gone the way of the DeSoto. One day, it will be interesting to look back and see which, if any, of today's innovative promises stood the test of time.

For corn and soybean producers concerned ethanol or biodiesel will one day become obsolete, predicting when that might happen is extremely difficult. It will likely depend on how fast the transition to a new fuel can be achieved, if at all. Of the two crop-based fuels, ethanol is more vulnerable to losing market share to an increasing number of electric vehicles. However, it is also possible higher ethanol blend rates will be needed to compensate for neglected oil production. Nearing 2023, U.S. oil supplies are at their lowest in eight years, and investment in new petroleum projects has been lacking. Until some magic new fuel appears, ethanol and biodiesel will likely be needed to extend petroleum supplies.

My advice for managing risk on the farm during what could be a time of great transformation is to stick to the basics. Start with a foundation of crop insurance and consider the purchase of inexpensive put options to give yourself a higher floor of price protection, when affordable. Don't expose the farm to unnecessary risks, and spread crop sales out over the time of year when local supplies are least available.

Keep your feet on the ground, and there's a good chance you'll do just fine -- maybe even prosper from lower input costs. If you become tempted to invest in some of these shiny new toys, heed Buffett's advice and go easy -- changing the world is not as easy as it looks.

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Comments above are for educational purposes only and are not meant as specific trade recommendations. The buying and selling of grain or grain futures or options involve substantial risk and are not suitable for everyone.

Todd Hultman can be reached at Todd.Hultman@dtn.com

Follow him on Twitter @ToddHultman1

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