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

ManagementOABA Annual Conference Wraps Up In Columbus
February 5, 2016
More than 300 Ohio AgriBusiness Association (OABA) members and industry professionals were on hand to engage in collaborative learning and Read More
Chesapeake Bay
StewardshipKeeping A Watch On Water Issues
February 2, 2016
During a down cycle in the market, it’s difficult to think about investing for the long term. For retail businesses, Read More
FertilizerFort Wayne 4R Farming Event Set For February 12
January 29, 2016
The Nutrient Stewardship Council will host a complimentary “4R Farming 4 Sustainability” educational workshop Feb. 12 in Fort Wayne, IN, Read More
Legvold Farm, Northfield, MN
LegislationASA Notes Progress, Urges EU To Improve Biotech Approval Process
January 29, 2016
The American Soybean Association (ASA) urged the European Commission today to continue its work in addressing delays in the approvals Read More
Top 100 Articles
Elburn Cooperative
CropLife 100Elburn Cooperative Members Vote To Join CHS
December 28, 2015
With 81% of eligible producers voting, 94% cast an affirmative ballot for Elburn Cooperative, a diversified agricultural retailer based out Read More
West Central Cooperative, Jefferson, IA
CropLife 100Farmers Cooperative-West Central Merger Approved
December 21, 2015
The members of Farmers Cooperative Co. (FC), Ames, IA, and West Central Cooperative, Ralston, IA, have both approved the merger Read More
Wheat Growers Innovation Center, Bath, SD
CropLife 100Wheat Growers Opens Innovation Center
December 21, 2015
Wheat Growers’ commitment in providing its farmer-owners with the latest in technological advancements now has a one-of-a-kind focal point, as Read More
CropLife 100ARA Selects The Andersons As 2015 Retailer Of The Year
December 9, 2015
The Agricultural Retailers Association today named Maumee, OH-based The Andersons as its Retailer of the Year for 2015. The award Read More
CPS Washington Court House John Deere Sprayer
CropLife 100Application Equipment Report: It Is Easy Being Green For Top 100 Ag Retailers
December 5, 2015
On The Muppets television show, Kermit the Frog is famous for singing a song about the troubles he encounters in Read More
Fertilizer Bin
CropLife 100Fertilizer Sales: Another Down Year For Top 100 Ag Retailers
December 4, 2015
In pure number terms, the fertilizer category still dominates all crop inputs/services among CropLife 100 ag retailers. In 2015, for Read More
Latest News
Crop InputsBayer Contests EPA’s Decision On Valuable Insecticide F…
February 5, 2016
Crop Science, a division of Bayer, has announced it has refused a request by the Environmental Protection Agency (EPA) to Read More
Wheat Field North Dakota
Seed/BiotechSyngenta Wins Seed Fraud Suit Against South Dakota Grow…
February 5, 2016
Syngenta has obtained a $25,000 settlement from Paul and John Mayclin, Mayclin Farms, Plankinton, SD, in response to their Plant Read More
ManagementOABA Annual Conference Wraps Up In Columbus
February 5, 2016
More than 300 Ohio AgriBusiness Association (OABA) members and industry professionals were on hand to engage in collaborative learning and Read More
Crop InputsBayer To Contest EPA Flubendiamide Decision
February 5, 2016
Crop Science, a division of Bayer, announced today it has refused a request by EPA to voluntarily cancel the uses Read More
Syngenta
Seed/BiotechNot So Fast: ChemChina Syngenta Takeover Could Draw Nat…
February 5, 2016
State-owned China National Chemical Corp. (ChemChina), which plans to buy Swiss seeds and pesticide maker Syngenta, will promptly start preparations Read More
Rendering of Syngenta Seedcare Institute expansion
Seed/BiotechExpansion Of Syngenta’s North America Seedcare In…
February 4, 2016
As demand for seed treatment knowledge and products grows among farmers, retailers and others in the seed industry, Syngenta is Read More
Soybean Field
Industry NewsArysta LifeScience Strengthens Sales Team
February 4, 2016
Arysta LifeScience North America recently announced three new personnel additions: Jake Cook and Peter White are Territory Sales Managers for Read More
Davor Pisk Syngenta COO
Crop InputsSyngenta COO: Why ChemChina Offer Beat Monsanto’s
February 4, 2016
Syngenta Chief Operating Officer Davor Pisk says he is confident the proposed acquisition by ChemChina will ultimately help preserve choice Read More
Young corn plants in soil
Crop InputsKoch Biological Solutions Invests In Pathway Biologic
February 4, 2016
An affiliate of Koch Biological Solutions, LLC has acquired a minority equity position in, and entered into collaboration with, Pathway Read More
Crop InputsABG: China Signs Off On Monsanto’s Roundup Ready …
February 3, 2016
Monsanto Co. on Wednesday announced it plans to launch its Roundup Ready 2 Xtend soybeans in time for the 2016 Read More
Syngenta headquarters in Basel, Switzerland
Crop Inputs6 Things To Know About The ChemChina-Syngenta Deal
February 3, 2016
After months of rumors and speculation, Syngenta has announced that ChemChina has offered to acquire the Swiss-based company. “In making Read More
FertilizerPhosphorus: Is Band Or Broadcast Application The Better…
February 3, 2016
Is band or broadcast application the better method when it comes to phosphorus? The answer to this question depends mostly Read More
Syngenta Sign
Crop InputsChemChina Nearing Deal To Buy Syngenta For Record $43 B…
February 3, 2016
China National Chemical Corp. is nearing an agreement to buy Swiss pesticide-and-seeds-maker Syngenta AG for about 43.7 billion francs ($42.8 Read More
Herbicides2015 ASA Trials Demonstrate Valent Fierce XLT Herbicide…
February 2, 2016
Valent U.S.A. today announced that new Fierce XLT Soybean Herbicide ranks in the top tier among growers for length of Read More
Crop Protection Products in storage
Paul SchrimpfCrop Input Selling: Return Of The Price List
February 2, 2016
It was a good 15 years ago, shortly after I first started writing for this esteemed publication, that it all Read More
Potash storage at Growmark
FertilizerThe Phosphate And Potash Outlook For 2016
February 2, 2016
Like other commodities, prices of the leading plant nutrient products dropped sharply in 2015. At this writing, the price of Read More
Chesapeake Bay
StewardshipKeeping A Watch On Water Issues
February 2, 2016
During a down cycle in the market, it’s difficult to think about investing for the long term. For retail businesses, Read More
Young Corn Plants
FertilizerNutrient Considerations For Low Corn Prices
February 2, 2016
Corn prices are low and many producers are asking tough questions about their nutrient management programs. Here are some suggestions Read More