Ag Bubble, Toil And Trouble
September 26, 2011 It’s getting harder and harder to ignore the evidence that the U.S. economy is sliding back towards another recession. Unemployment numbers remain high, consumer spending is virtually flat and economists seem convinced that slowing economic growth in China and the deepening Europe Union financial crisis will cause a negative cash ripple effect across the entire global economy.
And then there’s agriculture. Here, things look decidedly rosy at the moment. In fact, at the recent Mid America CropLife Association meeting in early September, virtually all the speakers pointed to the current state of ag as something to cherish. “I think it’s pretty unanimous right now – people are very enthused and energized about agriculture,” said Dr. Michael Swanson, agricultural economist and consultant for Wells Fargo & Co. “The amount of revenue today in the marketplace has literally tripled in the past three to four years.”
Even more encouraging, young people are again looking at agriculture as a lifestyle path. According to recent data from the Future Farmers of America, the organization upped its membership by 17,070 students during 2010-11, a record number of new members during a single calendar year.
Given these numbers, then, why is there talk of another ag bubble in the making? In our magazine’s September issue, BioScience Securities President/Founder Sano Shimoda and Terry Jones, president/founder of Jones Enterprises LLC, considered whether or not the industry is headed for Ag Bubble 2.0. To gauge the threat, Shimoda and Jones looked to the recent past.
“Crop prices peaked in 2008,” they wrote. “Record profits per acre were short-lived and dramatically declined due to the ensuring farmgate cost/price squeeze. Crop prices fell at the same time that many costs, notably seed and fertilizer, were still escalating. The dramatic reversal in fortunes for farmers’ bottom lines occurred even before the U.S. felt the full effects from the ‘Financial Armageddon’ that griped the U.S. and the world, starting in the fall of 2008.”
Will history repeat itself? For the general economy, the answer seems to be tilting into the “yes” column. But will agriculture follow? As Shimoda and Jones pointed out in their story, agriculture went down the financial crisis path first in 2008-09. That’s not how things have played out thus far in 2011, however, which probably bodes well for the remainder of the year and into early 2012. The danger time for the marketplace could come next fall, if prices once again compel growers to forego their fall application work and crop prices start to dip.
Ultimately, time will tell if this scenario comes to pass, as with all things in life. But color me just a wee bit worried if Ag Bubble 2.0 does go pop.
If this happens, I believe the recovery time for the ag community could stretch out for more than just a year or two.
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