Outlook 2010: The Big Picture

The U.S. economy has endured the most challenging period since the Great De­pres­sion. In recent months, the rise in the stock market and talk of “green shoots” have many prognosticating that the recession has ended and the recovery commenced.

But the exploding stock market has expanded valuations beyond the bubble years of the late 1990s, and recent earnings growth was driven largely by firing workers and cutting costs rather than selling more products to customers. Real recovery involves selling more goods and services and hiring more people, and neither of these has happened to a significant degree yet.

Our own fuzzy crystal ball shows a number of “brown shoots” of concern:

  • A huge overhang of consumer debt ($10-15 TRIL­LION) that must be slowly paid down over many years through a painful deleveraging process.
  • An unfolding crash in the commercial real estate market unlikely to bottom before late 2010.
  • A potential double dip in the housing market in 2010 driven by high unemployment and the need to refinance millions of Option ARM and Alt-A mortgages that are deeply under water.
  • Widespread deflation that is already occurring in the retail, housing, and commercial real estate sectors.

Our view is that we are experiencing a burst of growth that has been fueled by government spending. Imagine the economy is like a log in a fireplace. A dry log can burn by itself but a wet log (think debt) needs some fuel to get it to burn.

For the past 12 months, we have dumped a huge amount of fuel on that log in the form of government deficit spending and bailouts. The U.S. taxpayer (via “Cash for Clunkers” and “Homebuyer Credits”) is essentially paying people to spend money. Is anyone really shocked that the fire flared up a bit (a 60% increase in the stock market)?
But what happens now? In our view there are four “macroeconomic outcomes” for that old log:

  1. Global Economic Meltdown. The log quits burning and we give up trying to dump more fuel on it. This seems highly unlikely — if there is one thing we’ve learned over the past year it’s that the government is unlikely to stop trying things (anything) to get that log to burn … even if our kids have to pay for it for their entire working lifetimes.
  2. Japan. The log burns a little but mostly just smokes and smolders. The Japanese have been trying for twenty years to get that log to burn and it seems to be slowly starting to burn now because they gave it a long time to dry out while they dumped fuel on it regularly.
  3. That 70s Show. We keep pouring the fuel on that log and we overdo it … creating a rip-roaring flame that results in a surge of inflation (especially in commodities) like we had in the 1970s.
  4. Global Reflation. Under this scenario the government pours just the right amount of fuel on that log to get it to burn strongly and evenly without a flame up. Have you ever tried to burn a wet log in your fireplace? This is tough to do. Not impossible, but very, very tough.

Well Positioned

How will American agriculture do under these potential future conditions? Agriculture and commodities are likely to do significantly better than most sectors of the U.S. economy in the coming years. There are several reasons why U.S. agriculture is well positioned:

  • Supply. Despite recent great harvests, the carryover supply of most grains is still near historical lows. This means any spike in market demand can have a disproportionate impact on prices.
  • Demand. There are BILLIONS of people entering the middle class around the world. The first thing they do when they get more disposable income is eat more protein, and protein production requires grain. In addition, the ethanol industry, which barely existed seven to eight years ago from an economic perspective, is now consuming nearly half the U.S. corn crop.
  • Liquidity. The government is running huge deficits and injecting massive amounts of financial liquidity (fuel) into the system. Odds seem high that ag commodity inflation will be an outcome.
  • Currencies. Grains, oil, and metals are all priced in dollars but utilized globally. As the dollar continues to decline compared to other currencies (the cost of running the dollar printing press) the price of all commodities priced in dollars will increase.
  • Arbitrage. We convert corn into ethanol which can substitute for gasoline produced from oil. This creates a direct arbitrage between a barrel of oil and a bushel of corn that never existed before. If oil prices rise as in 2008, corn will follow.

We see very weak U.S. economic growth for several years with a distinct possibility of a double dip recession. The high unemployment and deleveraging of consumers will create mild food price deflation and weak domestic demand for high end food products (see high end beef) and variable channel strength (eating at McDonald’s vs. the steakhouse).

In the long term, we see strong global food demand, commodity inflation, and a weak dollar creating a very strong market demand for U.S. grains. This will be a bumpy, lumpy ride, but U.S. ag commodities are very well positioned for the future.

Leave a Reply

Management Stories

ManagementMACA 2014: The State Of The Agricultural Industry, And Then Some
October 9, 2014
The trade association’s annual gathering featured speakers from across agriculture and beyond. Read More
StewardshipA Multi-Layered Approach To Water Quality
October 6, 2014
Illinois event highlights research and technology designed to better monitor and improve water quality — and the benefits of cooperative, coordinated effort. Read More
StewardshipMichigan Agriculture Leaders On Toledo Water Ban: We Want To Be Part Of The Conversation
August 8, 2014
Leaders of Michigan agricultural organizations said Thursday that the government should not have a “knee-jerk reaction” based on last weekend’s water ban in Toledo due to fertilizer run-off in Lake Erie. Read More
ManagementRussia Bans U.S. And EU Ag Product Imports In Ukraine Sanctions Battle
August 7, 2014
Russian President Vladimir Putin has banned the import of agricultural goods from countries that have imposed sanctions on Russia. Read More

Trending Articles

Crop InputsPlatform Specialty Products To Acquire Arysta LifeScience
October 20, 2014
Once the acquisition is complete, Platform Specialty Products will combine Arysta LifeScience with previously acquired companies Agriphar and Chemtura Crop Solutions. Read More
Seed/BiotechMonsanto Offers New Support For Ferguson, Area Communities
October 8, 2014
Monsanto Co. has committed $1 million in new support for several collaborative efforts in Ferguson, MO, and surrounding communities in North St. Louis County. Read More
Seed/BiotechUnapproved Genetically Modified Wheat Found In Montana
October 3, 2014
USDA reports that one year after discovery of Monsanto's unapproved wheat in a single Oregon field disrupted U.S. wheat export sales, the GMO wheat has again been found in Montana. Read More
Equipment2014 Product Of The Year Voting
September 19, 2014
The deadline to vote for the 2014 CropLife IRON Product of the Year is October 31. Please cast your vote today to help us determine the winner. Read More
FertilizerFall Fertility 2014: Forecasting Fertilizer Use
September 7, 2014
Great crops this year have tapped the soil, and fall work is definitely called for, but how challenging will that get? Read More
CropLife 100CHS To Build $3 Billion Fertilizer Plant In North Dakota
September 5, 2014
The fertilizer plant in Spiritwood will be the single largest investment in CHS history, as well as the single largest private investment project ever undertaken in North Dakota. Read More

Latest News

InsecticidesValent U.S.A., MGK Form Marketing Agreement
October 24, 2014
Valent has formed an agreement with Minneapolis-based MGK to manage the marketing and sales of MGK’s crop protection line of insect control products within the U.S. beginning April 1, 2015. Read More
StewardshipFlorida’s 4R Advocate Keeps Improving
October 24, 2014
Florida farmer Alan Jones uses the 4R principles of nutrient stewardship as the core of his fertility program, which allows him to maximize production and keep costs in check. Read More
Seed/BiotechMonsanto Named One Of The World’s Best Multinational …
October 23, 2014
Monsanto ranked No. 8 in the world’s largest annual study of workplace excellence that identifies the top 25 best multinational companies in terms of workplace culture. Read More
Crop InputsArysta Hires Former Agri-Chem, CPS Employee For Delta S…
October 23, 2014
New Territory Sales Manager Mark Peel’s primary role will focus on working with growers regarding fungicides in Louisiana, Mississippi, Arkansas and Tennessee. Read More
CropLife 100GROWMARK Announces Appointments In Plant Food Division
October 22, 2014
GROWMARK, Inc. has announced the three key staff changes in its Plant Food Division. Read More
CropLife 100GROWMARK Appoints New VP Of Finance And Risk Management
October 22, 2014
Wade Mittelstadt has been named GROWMARK Vice President, Financial and Risk Mangement, effective December 1, 2014. Read More
FungicidesEPA Approves BASF In-Furrow Corn Fungicide
October 22, 2014
Field trials show Xanthion In-furrow fungicide provides more rapid emergence, extended residual control and improved seedling health than untreated crops. Read More
EquipmentAgraScout App Available At No Cost To Universities
October 21, 2014
AgraScout, a fast and easy to use mobile crop scouting app, is now available at no cost to University students, Read More
LegislationNew Farm Bill Program To Provide Relief To Farmers Affe…
October 21, 2014
The USDA has implemented a new Farm Bill initiative that will provide relief to farmers affected by severe weather, including drought. Read More
ManagementGreenfield Scholars Program Aims To Sustain Agronomy Wo…
October 21, 2014
The program encourages talented students to study agronomy, crop and soil sciences while cultivating networks to develop the necessary workforce to sustain the profession. Read More
Paul SchrimpfPrecision Ag: Taking It To The Hill
October 21, 2014
A new coalition took the good news message of precision agriculture to Washington, DC, last month. Read More
ManagementUSDA Awards $18 Million In Small Business Research Gran…
October 21, 2014
The grants will provide high quality, advanced research and development that will lead to technological innovations and solutions for American agriculture. Read More
FertilizerCF Industries Terminates Merger Discussions With Yara I…
October 21, 2014
CF Industries Holdings and Yara International have terminated their discussions regarding a potential merger of equals transaction. Read More
Seed/BiotechSyngenta Ranked A Top 10 Biotech Employer For Third tim…
October 20, 2014
Syngenta ranked in the top 10 among the world’s top biotech employers, according to an annual survey conducted by Science magazine. Read More
CropLife 100Wheat Growers Break Ground For New Facility At Kennebec
October 20, 2014
Wheat Growers has broke ground for a state-of-the-art shuttle loader grain handling, fertilizer and agronomy facility in Kennebec, SD. Read More
FertilizerVerdesian Life Sciences Signs Agreement With Los Alamos…
October 20, 2014
Verdesian Life Sciences has signed a licensing agreement with Los Alamos National Laboratory to develop and market LANL’s latest nitrogen enhancement technology for plants. Read More
MicronutrientsStoller Group Announces Groundbreaking At New Office Bu…
October 20, 2014
Jerry Stoller, founder and president of Stoller Group, announced the groundbreaking at the site of the company’s future headquarters in Read More
Crop InputsBioSafe Systems Opens New Production Facility In Nevada
October 20, 2014
BioSafe Systems has completed construction of a state-of-art production facility in Sparks, NV, for its line of activated peroxygen products. Read More