As I look toward the future I am reminded of the sage words of Sherman McGregor, who warned that whenever all the so-called “experts” were aligned in their rhetoric and seemingly all headed in the same direction, things were about to turn.
Agriculture has not yet reached the same level of “irrational exuberance” that characterized the stock market bubble in the late 1990’s or the real estate bubble in the 2000’s, but there are growing similarities. Thus far I have not heard anyone talk about what would have happened in 2012 if the severe drought in the Corn Belt had not occurred. But I did notice that yields in parched fields did not fall off as far as was expected and as a result, prices did not rise as much as was expected.
I have also noticed that despite the drought we appear to have enough corn/soybeans to get to another harvest and prices have been in moderate decline during a period when they should arguably be increasing due to below normal yields. If planted acreage this year comes in as high as is now being projected and we have more normal yields, the price of commodities could easily retreat to pre-drought levels by harvest, or lower.
In the short run I think retailers will have a solid spring in 2013, bolstered by demand created by new crop futures prices, crop insurance payments, and grower prepayments. In the long run, however, I think we are at the beginning of a reversion to the long-term averages for commodity prices. While I am not predicting a return to $3/bushel corn, neither am I counting on corn, soybeans and wheat remaining at today’s elevated prices much longer — let alone indefinitely. A crop disaster here or there may impact short-term prices, but long term it is highly doubtful current prices will be sustained unless (heaven forbid) our leaders fail to lead and our dollar begins to weaken under the weight of our ever-growing federal debt. If inflation appears commodity prices will adjust accordingly. If hyper-inflation appears all bets are off!
I believe the volatility that has characterized the last six years has already begun to moderate. Ironically, the very thing that retailers have been lamenting will soon be missed if the opportunity to generate significant profits from inventory gains subsides. Barring another global financial meltdown, we won’t fall off the cliff as we did in late 2008/2009. But a gradual reduction in commodity prices will mean a gradual reduction in the cost of inputs, and with that a gradual reduction in the earnings opportunities for those who produce and distribute crop inputs. It’s the “gradual” part that will limit volatility. It is the “reduction” part that will signal an end to agriculture’s most recent period of prosperity.
What about world population growing to 9 billion by 2050? What about all those new middle-income families demanding better diets? What about biofuels? Well, if you believe hunger and the desire for improved diets are the market signals that ensure continued agricultural prosperity, then I would ask why it took until 2007 A.D. for us to finally recognize what has existed since the beginning of time. The critical component of demand never has been about hunger or the desire to improve one’s diet and unfortunately it never will be. It’s about whether or not someone has the ability to buy the food they want and/or need.
And as for biofuels, when North America eventually becomes a net energy exporter, it will become increasingly expensive — financially and politically — to maintain the current subsidies for biofuels that are helping underpin commodity prices. So despite population growth, the desire for improved diets and biofuels, I am not inclined to pin my hopes on rhetoric that purports to provide an irrefutable rationale for unending agricultural prosperity.
If we want to make somewhat accurate prognostications about the future, we should carefully monitor the economies of the highly populated regions around the world and our own economy here at home. If the U.S. can somehow continue to consume foreign made goods at current levels and China and India continue to expand their economies, our domestic agriculture will likely continue to do well. If not, we just might find ourselves calling on some of the equity that has been booked on those balance sheets over the last six years. We should know by the end of 2013 whether or not our fortunes have begun to change.