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Farm
Update
Brian
Trumbore
President/Editor, StocksandNews.com
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.
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"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.]
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Wall
Street History will return next week.
Brian
Trumbore
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