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

ManagementWashington Update, Dow-DuPont Earnings, and the Passing of an AGCO Legend
April 27, 2017
Editors Paul Schrimpf and Eric Sfiligoj talk about the latest Beltway news, crop protection company 1st quarter numbers, and the Read More
Donald Trump
Crop InputsTrump Targets Agriculture with Latest Executive Order
April 26, 2017
(Via UPI.com) President Donald Trump on Tuesday took executive action in an effort to help grow the domestic agriculture industry Read More
Sonny Perdue
LegislationSonny Perdue Confirmed by Senate as Next Agriculture Secretary; Praised by ARA
April 25, 2017
After months without a secretary of agriculture, the Senate voted Monday evening to confirm former Georgia Gov. Sonny Perdue to Read More
Stewardship video screenshot
ManagementNew Video Raises Awareness of 2,4-D Stewardship
April 24, 2017
A new public service video developed and produced by the 2,4-D Research Task Force, in conjunction with the American Soybean Read More
Trending Articles
Crop InputsFlying Under the Radar No More, FMC Goes Big
April 13, 2017
Describing FMC as “under the radar,” admittedly, is probably a stretch. But in a snap of the fingers, FMC upped Read More
Young Corn Plants
Crop NutritionStill Hunting Yields
April 1, 2017
There’s no denying it — the agricultural marketplace today is undergoing a fundamental shift in fortunes. Not too many years Read More
Nutrients for Life Foundation Teacher
FertilizerNutrients For Life Foundation Celebrates 10 Years Teaching Fertilizer Education
March 23, 2017
Those in agriculture know fertilizer is a vital ingredient to grow strong, productive crops. In fact, fertilizer is responsible for Read More
AdjuvantsA New Weed-Control Era Begins: But First, One Last Obstacle
March 4, 2017
There is trepidation, there is reluctance, and there is excitement. Ag retailers feel it all about the new dicamba and Read More
LIFT Academy video screenshot
Crop InputsLIFT Agriculture Academy: A Q&A With West Central Distribution’s Dean Hendrickson
March 1, 2017
West Central Distribution recently launched its LIFT Agriculture Academy, a new, premiere training and professional development resource for West Central’s ag Read More
Farmer and aptop
Matt Hopkins10 Warning Signs Your Website Is Grossly Outdated
February 8, 2017
Your Website is often a visitor’s first impression of your ag retail business. A positive first impression can set the Read More
Latest News
ManagementWashington Update, Dow-DuPont Earnings, and the Passing…
April 27, 2017
Editors Paul Schrimpf and Eric Sfiligoj talk about the latest Beltway news, crop protection company 1st quarter numbers, and the Read More
BRANDT
CropLife 100Former PotashCorp COO Joins BRANDT Board
April 27, 2017
BRANDT has announced the appointment of another industry veteran to its board of directors. David Delaney, most recently EVP and Read More
Syngenta headquarters in Basel, Switzerland
Crop InputsFortune: Inside China’s $43 Billion Bid for Food …
April 26, 2017
(Via Fortune.com) The worst famine in human history occurred in China from 1959 to 1961. An estimated 34 million people Read More
Syngenta Sign
Crop InputsSyngenta Announces Changes in Board of Directors
April 26, 2017
ChemChina and Syngenta announced changes relating to the new Board of Directors of Syngenta following the closing of the ChemChina Read More
Crop InputsBioSafe Systems Introduces PerCarb Broad-Spectrum Bacte…
April 26, 2017
BioSafe Systems announces PerCarb (Sodium Carbonate Peroxyhydrate), a new alternative to potassium bicarbonate and lime sulfur products for use in Read More
Deere Twitter
EquipmentTop 10 Twitter Pics for #Plant17
April 26, 2017
Despite some wet weather in parts of the Midwest, growers and ag retailers are working feverishly to plant this year’s Read More
Donald Trump
Crop InputsTrump Targets Agriculture with Latest Executive Order
April 26, 2017
(Via UPI.com) President Donald Trump on Tuesday took executive action in an effort to help grow the domestic agriculture industry Read More
AGCO Ratliff featured
EquipmentAGCO Mourns Passing of Company Founder, Industry Vision…
April 25, 2017
AGCO Corp., a worldwide manufacturer and distributor of agricultural equipment and solutions, mourns the passing of founder and former President, Read More
Engenia soybeans
Crop InputsINNVICTIS CROP CARE Introduces VANDAL MOC Soybean Herbi…
April 25, 2017
INNVICTIS CROP CARE, LLC has announced the U.S. EPA registration for VANDAL MOC, a combination of sulfentrazone plus metolachlor. VANDAL Read More
Kochia
HerbicidesINNVICTIS CROP CARE Launches STAVE Post-Emerge Broadlea…
April 25, 2017
INNVICTIS CROP CARE, LLC has introduced STAVE as the newest addition to­ its expanding portfolio. STAVE will be a great Read More
Sonny Perdue
LegislationSonny Perdue Confirmed by Senate as Next Agriculture Se…
April 25, 2017
After months without a secretary of agriculture, the Senate voted Monday evening to confirm former Georgia Gov. Sonny Perdue to Read More
BPIA logo
Seed/BiotechBPIA Files Comments with USDA
April 24, 2017
The Biological Products Industry Alliance (BPIA) has filed comments with the USDA’s Animal and Plant Health Inspection Service (APHIS) Plant Read More
Eric SfiligojHope for Application Equipment Sales
April 24, 2017
The old saying goes that a “rising tide lifts all boats.” If this is indeed the case, then things may Read More
Stewardship video screenshot
ManagementNew Video Raises Awareness of 2,4-D Stewardship
April 24, 2017
A new public service video developed and produced by the 2,4-D Research Task Force, in conjunction with the American Soybean Read More
ManagementAn Inside Look at Award Winning Ag Retailer Gar Tooteli…
April 20, 2017
CropLife Editor Eric Sfiligoj discusses An Inside Look at Award Winning Ag Retailer Gar Tootelian Read More
Students Soybean Field
Industry NewsMACA Announces 2017 Young Leader Scholarship Recipients
April 19, 2017
The Mid America CropLife Association (MACA) Board of Directors selected 11 college students to receive the MACA Young Leader Scholarship Read More
Growmark FS Outlet
SoftwareKnoa Software Solution Helps GROWMARK Boost System Perf…
April 19, 2017
Knoa Software, a leading provider of user experience management (UEM) software, has announced that GROWMARK, Inc., a regional agricultural cooperative Read More
Crop InputsFBN Publishes ‘Voice of the Farmer’ Agricul…
April 17, 2017
Farmer’s Business Network (FBN) released today its “The Voice of the Farmer”, which the company is describing as “a special Read More