Sabbath eve, September 3, 2010.
I’m no accountant, but I can count. I am no economist either, but I do recognize the smell of bull shit when it comes along. More on that later.
To begin, an update on the corn harvest. I failed to mention last week that I had about 5 acres of yellow corn planted in an isolated field. It too is a non-hybrid, non-genetically modified variety, yellow trucker’s favorite, should you care to know. I had a hard time acquiring this seed and planted the field with hopes of making enough to plant on a larger scale next year.
Tie vines (Morning Glory) had formed hedge-like trellises on the stalks of yellow corn. Quentin made a couple of passes with his combine and decided not to harvest the rest, leaving some three acres un-harvested. He then moved to our Belmont farm and harvested the rest of the white corn which yielded 90 bushels to the acre, despite significant losses to feral hogs over the last month or so.
I sent a couple of men to pull ears of yellow corn and sack it. The men earn $60/day, plus housing and utilities. They picked for 4 days and still are not done. Yesterday, two men picked 30 bags of shucked corn still on the cobs. I’ll be generous and call their haul 30 bushels of shelled corn. To be fair, these men have other duties and did not spend the entire day picking corn, but their efforts would be considered a full day by city standards. Corn prices have jumped to $4.64/bushel, historically a high price. Last week, local feed mills offered me $3.50/bushel as if they were doing me a favor. So at today’s price the value of the corn they picked is $139.20, delivered to market. I have seed, fuel, fertilizer (chicken litter but that too costs money to haul and spread), labor, and machinery costs, not to mention the cost of land invested in the crop. So I paid $120 in harvesting costs to pick up $140 worth of corn.
My men are not getting rich earning $60/day. The work is brutal. For the record, earlier in the week another man thinking he wanted a job in our field lasted one hour before hitchhiking home without bothering to collect a check and yet another picked one sack and expects to be paid for a full day for his effort. So I’m really losing money on the deal without even accounting for other production costs.
The point I’m making is that the food you eat is ridiculously cheap, and the day fossil fuels become scarce or expensive is the day your food bill is going to skyrocket. If you’re lucky enough to be able to buy food, that is….
And now, to back of the envelope economics. Recently, oil field lease prices in our region have spiked. The target appears to be a formation called the Eagle Ford, a shale type zone that was not profitable to drill with vertical well technology. Land that could have been bought outright in southern Gonzales County for perhaps $1,200 an acre a few years back is now fetching $4,000 an acre for mineral rights alone. A friend I know tells me there’s a company, one of several, that has budgeted a billion dollars for acquisition and exploration in Gonzales County for the coming year. That’s one company, one county.
Now tell me, where in hell is all this money coming from?
Here’s what I suspect. It starts with the Fed and zero interest loans to major players, made from thin air. There’s a lot of money out there but most of it isn’t in circulation. With the recent woes in the Gulf of Mexico, and potential problems with foreign sources of imported oil, it takes no genius to figure out that domestic sources of oil will fetch premium prices.
As Bush learned during Katrina, throwing money at a problem doesn’t necessarily fix ills. Money doesn’t build houses, hands do. You need cement, bricks, mortar, steel, wood and nails. Fuel to power machines. And the sweat of workers.
Throwing money at oil fields doesn’t necessarily mean increased production either. To begin with the oil must be there. Then a hole has to be drilled with much greater precision than in days of old. Expensive fracking techniques have to be employed in shale type formations due to the lack of permeability. There is no such thing as a 100% success ratio when drilling wells.
I am of the opinion that this oil is going to be very costly to find and produce. We have lots of money chasing very little product.
I’ve read the deflationist’s arguments and I understand where they come from. I leaned more toward their models than the rest in months past, but as time goes on, it seems they fail to take into account the extraordinary efforts of the Fed and the Treasury Department to pump money into this economy by whatever means they can conjure.
The Bernanke hypothesis implies that if you pump enough money into the economy, eventually most bad loans on the books will be cured and people will go back to work. But the money is being hoarded and piled up in the accounts of a tiny segment of our population. Despite what they say, the Fed is buying stocks through the Goldman Sachs, JP Morgan and the rest of the Wall Street insider crowd. And I’m guessing they’re also buying oil leases through major banks. That, despite the fact that leases are already reaching prohibitive values assuming the current price of oil.
I don’t know exactly how this ends, but I am relatively sure it won’t be like that the Great Depression of the 30’s. I expect a hyperinflationary collapse, at some point, at least for integral goods and services like food and energy. We have too much money chasing not near enough goods.
I could be wrong.
I do know this. The rest of the world is not going to sit back and let us continue to create money out of thin air, indefinitely, without paying a price.
James Kunstler that said the first Depression was best described as want in a time of plenty. And that the next event will be want in a time of scarcity.
I don’t know what that looks like, and I doubt you do either. But we are about to find out.