Grains will fare well during global financial restructuring
The market bulls might well be on the loose for the next three to five years. Peter Zeihan, vice president of global analysis for the Stratfor Group, believes the huge advantages created by the U.S. transportation sector coupled with financial stability bode well for farmer fortunes, specifically grain and oilseeds.
"It will be a very rocky road. It won’t be a straight line to heaven," said Zeihan at the Top Producer Seminar. He sees major financial upheaval in China and Europe, but expects staple U.S. agricultural sectors, such as corn, to actually prosper during the next five years. He has a less sanguine view of U.S. livestock sectors because beef and pork exports are higher-priced and don’t cope as well as grain when global economies are contracting.
Infrastructure Matters. Zeihan remains optimistic for the U.S. farm sector overall, in large part because the U.S. has such a comparative advantage with transportation. This is particularly true of the U.S. waterways network, which puts the majority of agriculture within 200 miles of a major river thorough-fare, along with the country’s highly developed port system.
The U.S. cannot discount the fact that its river system is aging and in need of investment, but river shipping has a 70 to 1 advantage compared with any other shipping method, Zeihan said. It’s cheaper to ship by boat from the U.S. to southern France, for example, than to transport goods by truck from northern France to southern France. Even though Brazil is investing in and expanding its port system, all of that country’s current ports combined are no larger than the Port
of New Orleans.
In Brazil, farmland is in the hands of oligopolies, and each one is developing its own transportation network that is not shared for maximum benefit as in the U.S., Zeihan explained. "Brazil doesn’t have family farmers," he noted. Further-more, in Brazil’s Cerrado region, everything has to be trucked out. That said, he is optimistic about Brazil’s agricultural sector in the long term, though developing an adequate transportation system could take decades.
Change Is Coming. "The world financial structure is on the edge of a major evolution," Zeihan said. Because of the global financial adjustments he sees coming, two-thirds of the global money supply will have less value overnight.
China in particular is headed for major change. "In three to five years, the Chinese [financial] system will crack," Zeihan said. While the Chinese government claims to have an inflation rate of 3% to 5%, it’s probably more like 20% to 25%, he added. Furthermore, even though it’s growing, only 30 million Chinese today are considered middle-class, largely those who live at or near
the coast. More than 1 billion of China’s mammoth population lives at the level of sub-Saharan Africa.
Adding more fuel to the fire, Chinese lending to industry is not based on profitability, as it is in
capitalist nations. The government makes loans based on how many people will be employed by the loan. As a result, the system has been making bad loans for years. From 2007 to 2009, the Chinese government tripled lending volume, but when the money supply tightened, the banks started running out of deposits. In response, the government, which controls China’s financial sector, started printing more money. It’s bizarre to see such an inflationary/deflationary mix, Zeihan said.
No Reason to Panic. Despite mounting financial problems, Zeihan believes there is no reason to panic about grain exports to China. Livestock exports are a different story. Pork is not a staple in China, he noted, so it’s not as good a business to be in when the economy falls apart. Because of changes in political leadership, Chinese financial reforms will not occur for a few years. Zeihan expects financial changes in Europe as well, and the euro might be headed for trouble.
Against such a backdrop, the U.S. is an island of stability. "America will be calling the shots for a while," Zeihan said.
- March 2012