|
|
Wall Street History
https://www.gofundme.com/s3h2w8
|
02/22/2008
Farm Update
I have had an almost 10-year relationship with a classic farm family in the Oklahoma Panhandle in an effort to stay somewhat current on the farm sector and as part of my ongoing research (in addition to my week at the Iowa State Fair last summer), I have a subscription to High Plains Journal, a weekly publication for farmers. There are some excellent columns in it and one regular, Ken Root, wrote a piece in the January 21, 2008 edition that I found enlightening.
Ken and I have exchanged notes in the past and I asked his permission to reprint the following which he graciously granted. Ken has been an agricultural reporter for 34 years and is the lead farm broadcaster at WHO Radio in Des Moines, Iowa.
---
“Will agriculture follow U.S. economy into recession?”
Friday, January 11 showed the volatility in the commodity markets as the U.S. Department of Agriculture released the final report on 2007 crops. A simple rebalancing of yield and usage panicked the trade and slammed corn, wheat and new crop soybeans against the limit up barrier with analysts predicting more up trends in trading sessions to follow. In this euphoria of record high grain and hay prices, there is the underlying threat that the U.S. economy will dive into recession. We’ve been here before and I hope we don’t make the same mistakes this time.
The boom in grain prices seems to come from several aligning factors, but primarily, the credit can be given to a weak U.S. dollar in world markets. This has distorted our view of the rising costs, and rising value of commodities. Adding to this, we’ve seen incredible demand for oil and dismal wheat harvests worldwide, including Texas, Oklahoma and Kansas. The mandate for increased ethanol production and the rush to build capacity, now makes it the second largest usage of corn behind livestock feeding. Exports accelerated, even at higher prices, because (thanks to the cheap dollar) the real cost to most buyers was still within their budget. The commodity index funds are giving the market even greater strength, as they seek to make money in the seemingly unending uptrend. Every time the market tops out, another surge of positive news comes along and sends it higher and the funds amplify their gains.
All this good news masks the future when a number of scenarios could play out: a grain embargo, opening of the conservation reserve, eliminating ethanol price supports or rolling back biofuels usage mandates.
It seems unlikely that peace will break out in the Middle East; so, the ‘risk premium’ on oil should remain intact, but there will be a change in the White House in one year and the new president will almost surely change the strategy in Iraq. The new administration is also likely to implement programs to address global warming and this should favor agriculture and ‘green energy’ production.
In the 1970s, following the big sale of grain to the Soviet Union, U.S. agriculture was doing very well as inflation spiraled and recession loomed. Based on paying off debt with cheaper dollars, farmers made good decisions in the late ‘70s that became bad decisions in the early ‘80s and sent the industry and the culture into its bleakest times since the Great Depression.
Now we are completely through the down cycle and even have a new generation that has only recently known prosperity and has not seen a great market reversal. Everyone needs to get rich once and lose it, to really appreciate it the second time around. The older generation, however, is not doing much better as a group of seventy-something men in Iowa excitedly informed me last week that they were holding large quantities of grain and looking for the top of the market. The excitement of the moment caused their physical characteristics to be similar to four-year-old boys needing to find a bathroom.
In the overall economy, the threat of recession often causes a recession. Consumers who hear the news and cut back on spending exacerbate an already precarious situation and the economy begins to collapse. As the recession becomes more obvious, the downtrend accelerates. In agriculture, the classic setup for a fall begins as an up market builds excitement and farmers hold grain away from the buyers until unknown events cause a market topping action that would be inconsequential at lower levels. The downtrend causes nervous sellers to dump their grain and the market collapses. Hope, greed and fear are still with us.
For those who make a living from livestock, the recession is already here. The combined factors of higher costs and lessening demand have pretty much eliminated profit from your ledger. How smartly you’ve contracted, or how quickly you can retreat, will decide your fate. People buy less steak when they are pessimistic but they do stay home and eat more hamburger, pork and chicken.
What is playing out here is pure American capitalism. It is based on risk, reward and freedom to fail. Note that I have not mentioned the new farm bill, as it will only come into play when prices are low. The new U.S. Secretary of Agriculture is an afterthought in Washington, D.C., as his role is much less important now than it will be at the depth of a recession or following a market collapse.
As I see it, this is going to be a bumpy year for grain farmers. It is going to be a grumpy year for livestock producers and it is going to be a volatile year for the U.S. economy. With the length of this commodity price uptrend going through two harvests and the potential for forward contracting five dollar corn, eight dollar wheat and twelve dollar soybeans for one to three years, the true character of the farmer is going to come out. Will you be caught up in the fallacy that “this time it is different” or will you remember history and prepare for the economic cycle to gyrate into the future?
[Note: Since Ken Root’s piece in January, commodity prices have continued to rise across the board.]
---
Wall Street History will return next week.
Brian Trumbore
|
|
|