Is Agriculture Overreacting To A Hint Of A Market Downturn?

Is Agriculture Overreacting To A Hint Of A Market Downturn?

The age-old riddle asks what came first, the chicken or the egg? In agriculture these days, however, the riddle might be better worded as what came first, the market downturn or the response to it?

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For anyone paying attention, the past few years for agriculture have been truly “the best of times.” Commodity prices have remained high as demand as increased. In turn, this has allowed farm income to climb to an incredible $130.5 billion in 2013. And much of this has inevitably made its way into many of the bank accounts of those companies that cater to agricultural needs. This includes fertilizer suppliers, equipment manufacturers and, of course, ag retailers.

But with this streak of success comes the desire to see things continue to grow perpetually. And that’s usually not how any economic system works. Sooner or later, a downturn does occur.

And that’s starting to happen to agriculture right now. In February, USDA released its projections for farm income in 2014. According to this report, incomes will drop 27% this year to $95.8 billion. USDA blames declining commodity prices for this slide.

As a result, growers are expected to plant significantly less corn in 2014 compared with the past few years. Right now, USDA is projecting 91.7 million of acres of corn will be planted this year, a decline of 6% from the 2013 total. This has led to doomsday-ish headlines in the popular media such as “Corn Farmers’ Seed Of Doubt,” which appeared in a recent edition of the Wall Street Journal.

Unfortunately, these “hints” of a market downturn in agriculture has caused many companies to begin pulling back on there plans for 2014. Already, several fertilizer suppliers have announced employee layoffs. Likewise, a few equipment manufacturers have began scaling back on their marketing and production plans for the second half of the year.

To those in the know, all these moves tie back to a number — and it’s not a sales or crop acreage figure. It’s a year.

In mid-2008, everyone remembers that high fertilizer prices led to a significant market crash. Ag retailers that stocked up on fertilizer during the spring were forced to write-down millions of dollars when inventories failed to move by the end of year. Since then, many of the players in ag have been quick to overreact to any bad news.

In my judgment, it’s too soon for such dramatic steps. True, farm incomes and corn acreage are down. However, $95.8 billion is still a lot of money and 91.7 million acres of corn is still a lot of corn. Also, there are some significant unknowns on the horizon that could shift commodity prices back up. This includes the ongoing crisis involving the Ukraine (which ranks fourth in the world in exports of corn and wheat) and the U.S. weather (which has been very unpredictable the past few seasons).

The bottom line is simple: Hints are great in some instances, but nothing should trump good old solid facts. Right now, these are hard to come by.

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