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John's World
Friday, September 21, 2007
Another reason to be concerned about the economy...
One of the highlights of consumer spending has regularly been the steady splurging of the topmost spenders. Like people who didn't blink when the $600 iPod debuted this summer. So my thinking is if that group stalls out, it is a sign the rest of us won't have much extra cash. Apple stunned the business world by announcing sharp price drops, and along with other indicators, there are suspicions this means something. But the gonzo cuts can have negative results after the initial frenzy. First, it makes chumps out of the customers who made the product a hit—and profitable at full price—in the first place. Early adopters who paid through the nose for the new iPhone, were iPissed when they realized that their technologically less-forward neighbors could get the exact same product for one-third less a few weeks later. In response to an avalanche of angry e-mails, Jobs responded that he really cut the price in order to help all those who paid $599 for it. "It benefits both Apple and every iPhone user to get as many new customers as possible in the iPhone 'tent.' We strongly believe the $399 price will help us do just that this holiday season." How would you feel if you bought a condo in a Hovnanian development last month, only to find that your new neighbor paid significantly less for the exact same floor plan? [More] A softening general economy could mean even lower interest rates, as Fed action and recent comments this week seems to indicate less concern with inflation and more with growth. Where will land prices go if mortgage rates slide back down? Labels: economy Wednesday, September 19, 2007
Fallout from the housing slump...
Our neighbors adjusting to the repercussions from the American economic headache, just as they tagged along on the ride upward. The loonie is at $0.99 - a thirty year high. If you live along the friendliest of borders, the impact is considerable.
Perversely, the rising price of lumber won't be much help to our struggling housing sector, raising home construction costs just when they need to trim prices to reach now-unqualified buyers. The slump in housing could continue for a significant period, I think as the dame factors that made the boom unwind. No more. With U.S. home building in the dumps, Romero is working sporadically and sending little money. Diaz and her three young boys are eating rice and beans. She is watching every centavo. While this may relieve many who are concerned about illegal immigration, it could be relatively good news for agriculture, which has been struggling to compete for jobs. Harvesting crops is widely perceived as the least desirable of the difficult jobs immigrants typically do ( although having hung drywall, I would debate that). Still as the economy sputters due to the housing slowdown the transition for workers will only make life for the working poor more uncertain. Obviously the Fed is concerned, and their action yesterday to try to prevent further damage to credit markets and economic growth indicates to me they anticipate a deeper effect than many. The tendrils of interaction in our economy can often be hidden until they unravel. Over the next months I think we will be surprised by other daisy-chained consequences of what was essentially bad mortgage lending practices. Labels: economy, immigration, trade Wednesday, September 05, 2007
Rethinking manufacturing - and farming...
An outstanding article in the WaPo (as linked by Cat0@Liberty) reset my conviction we are on our way to very few manufacturing jobs in the US. The United States makes more manufactured goods today than at any time in history, as measured by the dollar value of production adjusted for inflation -- three times as much as in the mid-1950s, the supposed heyday of American industry. Between 1977 and 2005, the value of American manufacturing swelled from $1.3 trillion to an all-time record $4.5 trillion, according to the Bureau of Economic Analysis.Color me surprised. I had acquired the hazy notion US factories were disappearing - not changing industries. The real problem is the same one facing much of our profession as well: the jobs with a future in the US are jobs requiring highly skilled workers. During the most recent decade, U.S. manufacturing has become increasingly oriented toward the middle and upper ends of the value-added spectrum. Opportunities abound for workers with skills or the willingness and wherewithal to acquire them. In fact, the title of the National Association of Manufacturers tenth annual Labor Day Report on the state of U.S. manufacturing is “Rising Incomes Cushion Economy,” and its subtitle is “Finding Highly Skilled Workers Remains a Challenge for Manufacturers.” It seems to me that rising wages should make more workers willing to get the skills, and the need to find highly-skilled workers should induce manufacturers to assist on the wherewithal front.We are pretty soft-spoken about educational standards or training requirements in agriculture. In fact, highly educated entrants into farming are often resented by colleagues as usurping a role that should be "reserved" for those who work hard and and possess more humble but admirable attributes. I mean, those guys could be doing hotshot jobs in the city, instead of displacing less qualified farmer wannabes. Indeed a significant number of present farmers are farming largely because they were not interested in educational challenge of occupations requiring degrees or other formal training. Nevertheless, I believe developments like the human resource needs in manufacturing are being mirrored in agriculture. In addition, the subsequent quantum leap in capital management skills needed, wild volatility, and rapid adoption of technology combine to select for farmers with a much wider and deeper knowledge base and skill set. In fact, the current boom (Why didn't I grow some wheat this year?) could make farms capable of bidding for the fabled "best and brightest" along with other professions. This sounds like a good idea until you realize we are becoming more intensely competitive at the same time. Having the "b & b" farm next to you is somewhat more sobering if you yourself are merely good and bright. Thursday, July 12, 2007
Eat Chinese dust, Germany!...
China is about to pass Germany as the world's third largest economy. This is earlier than forecast and supported by statistics of questionable accuracy, but still not unbelievable. The National Bureau of Statistics raised its estimate of China's 2006 growth rate from 10.7 percent to 11.1 percent. It nudged up its estimate of total output by 146.4 billion yuan ($18.8 billion) to 21.1 trillion yuan ($2.705 trillion).In another surprise ranking, author J. K. Rowling just passed Belgium. Labels: economy, fun, international Sunday, July 08, 2007
Ethanol and organic...
Despite claims to the contrary, rising corn prices - which have been loudly ascribed to ethanol production - do raise food prices eventually. Ask the meat industry. Or dairy. [And stop trotting out the corn flakes.] The rising food costs fueled by ethanol demand are also affecting U.S. consumers. "All things that use corn are going to have higher prices and higher cost, to some extent, that will be passed on to consumers," says Wally Tyner, professor of agriculture economics at Purdue University. The impact of this is being felt first in animal feed, particularly poultry and pork. Poultry feed is about two-thirds corn; as a result, the cost to produce poultry--both meat and eggs--has already risen about 15 percent due to corn prices, says Tyner. Also expect corn syrup--used in soft drinks--to get more expensive, he says. [More] So, what will food inflation mean for the nascent agrarian (organic, local, free-range, etc.) food industry and the premiums they need for profitability? One speaker in particular championed this concept, suggesting that the opportunities for premiumisation were almost limitless. Now don't get me wrong, I am well aware that the likes of Whole Foods and Tesco and brands like Rachel’s Organic and Green & Black’s have successfully travelled down this road in recent years. But something about his unqualified optimism didn't sit well.As Dean Best points out, the answer depends on how the economy fares, or at least the personal economies of those who are likely to favor agrarian food - i.e. the well-to-do. So far that group is doing very well, thank you. But their numbers may have trouble growing, since the bulk of income growth in the US seems to wind up with the already wealthy. And should recession loom, that tiny group of consumers won't be swelling, I'd bet. Agrarian producers have more at stake in the fiscal decisions of the government than the farm bill, I think. I mean, it's not like they are getting much government help now, and agrarian production is growing. What this sector has to fear is 1) continued income gain concentration and 2) slow or negative GDP growth. Friday, June 01, 2007
Maybe your check won't bounce after all...
A good summary of the condition of Social Security. Labels: economy, finance, policy, retirement
Even trickles can make a difference...
As the world quietly passes a milestone of becoming more urban than rural, the most rural of all - peasants in China - may slowly be gaining ground. Most of the houses have obviously been newly rebuilt, with brick walls and higher roofs. (Feng Shui and the cost of land may explain why houses stay on the same plots.) This is entirely typical for the area. It's dangerous to generalise about a huge country from anecdotal evidence; still, it is evidence that at least one substantial group of Chinese peasants are doing absolutely better than before, whether or not they are falling relatively behind the city-dwellers. [More and great photos of stuff other than tourist sites] The billions of trade dollars pouring into China are of course being sopped up mostly by a few entrepreneurs (to use the polite word) and a growing middle class in the cities, but to be fair, the Chinese government is taking some steps to help the vast countryside and rural population live better lives. It is both sad and hopeful that only a few dollars can make such a big difference there. Labels: culture, economy, globalization, population Wednesday, May 30, 2007
OK, maybe it matters a little bit...
I cannot deny being a flummoxed by the inertia of our behemoth economy. It shrugs off problems like the housing slowdown and marches on. The deficit balloons and no lightning strikes. The president claims that his $2.57 trillion budget is the first step on the road to fulfilling his campaign promise to halve the deficit by 2009, even if Congress agrees to make his tax cuts permanent and enacts still more reductions. That claim is completely unfounded. Indeed, if the White House team that drafted this budget were subject to Sarbanes-Oxley, criminal indictments would be flying. This has been a bad time for doomsayers. Nonetheless, I feel like saying some doom. And I'm not alone. Modern accounting requires that corporations, state governments and local governments count expenses immediately when a transaction occurs, even if the payment will be made later. One thing I have noticed during my life is how long it takes for the trees to fall. Even after the final through-cut is made, a large tree will remain upright, only slowly developing the momentum that hurls it to earth. I have witnessed this same phenomenon as farmers who farmed badly took decades to exit, despite doing everything wrong at every chance. We Boomers may pull off the last great generational robbery as we suck resources from future generations aided by fictitious accounting illustrated above. Not a great epitaph. Friday, May 04, 2007
Is it me or are we going deeper into the woods?...
The housing market was a dependable source of painless savings for so long, and I think at the microscopic level, many citizens built futures on the premise home prices would continue to escalate reliably. This plan is being reconsidered now. But while the general economy has moved ahead without the housing sector, the jury is still out on whether we have hit the bottom of the housing cycle. One noted expert thinks not. Robert Shiller is worried about your home's value, and that's not good. A finance and economics professor at Yale, Shiller proved he could see a crash coming with his book "Irrational Exuberance," which forecast the end of the 1990s stock bubble and hit bookstores in March 2000 - almost to the day the Nasdaq started to collapse.His prediction? Brace yourself: In fact, I'm inclined to think there's a good chance that the return on real estate will be negative, substantially negative, over the next 10 years because all booms reverse in the end. [More depressing reading] On that happy note, let's consider some implications. Hardest hit in the current doldrums were housing "flippers" - amateurs working on limited capital turning properties rapidly. Since this is a risky activity in boom markets, it snowballs when prices dip even slightly. This is why investment property could be clobbered. Then there are Boomers who decided their house would be their retirement plan a few years ago. Actually many of us would have been OK if we had cashed out in say, in 2005. But unless you're holding a condo in Manhattan, your retirement nest egg may not be what you had hoped. To be sure, if you have been in your house fro a considerable time, and the especially if the mortgage is paid, you still have a pile of equity - but maybe not the kajillions you hoped. But the truly scary scenario is at the bottom of the home buyer pyramid. Subprime mortgages were another real-estate gimmick that seemed feasible as the tide was coming in. As these loans head south, the defaults have crimped earnings at several financial companies. They will survive, and don't need my tears. But borrowers with less than perfect credit are now out of the market and also - more importantly, I think - out of the home-equity loan market. Notice how those ads are scarcer recently. Home equity loans fueled a significant portion of consumer spending growth, thus driving the economy as businesses held back on capital spending. What do all these developments suggest? First, if Shiller is right, we may not be close to seeing the effect of lower home prices on the economy as a whole. More and more borrowers will be at least frozen in place instead of ratcheting up the equity ladder. You may be stuck with actually paying off your mortgage. Labor will become slightly more fixed in place, as relocation costs for companies skyrocket and workers choose to stick it out in the old job. Retirees will recalculate their last day differently as well. The upper end seems to be bulletproof so far - largely untouched by the loss of equity and shrinking pool of buyers. But interestingly one big loser could be Uncle Sam. But there's a more alarming explanation for the surge in tax revenues. It could be that the orgy of speculation in recent years—in housing, stocks, investment instruments—has generated an unexpected gusher of the types of tax revenues derived from flipping assets and trading securities. And that suggests that with the housing boom over and the stock market moving sideways, tax-revenue growth could be slowing down, and soon. [More] Of course, the current fad in DC is not fiscal restraint, so it may not get much play unless deficits approach the the gold standard of $450B or so. Still, it might become a slightly hotter talking point. But what about farmland? Don't color me worried. And here is why - can you say "mandate"? The measure would establish an overall goal of reducing future gasoline use by as much as 45 percent below what it otherwise is expected to be in 2030. That would happen through a combination of more biofuels, such as ethanol, and production of more gas-electric hybrid vehicles and other fuel-saving measures. Land prices are firmly in the grips the need for carbohydrates to make fuel. This was an auction of 160 acres. The ground was flat, systematically tiled and nearly all tillable. Selling price: an eye-popping $6,731 an acre. A local farm family who were expanding their operation purchased the farm. {more detail from Mike Walsten's new farmland blog - subscription to PF required, but worth it] Now this example is Hoosiers, of course, so we have no idea what real free-spenders might be paying. We won't even miss 1031 buyers, IMHO. In fact, farmers could start our re-ownership of agriculture in this window of opportunity. Wednesday, April 18, 2007
The affordable food undertow...
As farmers loudly proclaim the "affordability" of food (hoping to imply cheap), we have suddenly come face to face with the logical consequence of this statistic. First off, we use "affordable" because it allows us to breeze past the actual cost of food and talk instead about how much of the consumer's disposable income gets spent on food. Consider these questions:
While it's true we spend less of our income than almost any other economy, it's because our incomes are so high. Families spent just 9.9 percent of their 2005 disposable personal income on food—As disposable personal income continues to climb, the share spent on food declines. [And this is the USDA, folks - our PR agency.]If you compare people with similar incomes, we spend more than some and less than some. There are good reasons geezers retire to Mexico, for example. Cheap margaritas is one, but cheaper food is another. According to a friend of mine, tourists in places like Cabo San Lucas are happy campers, eating very well for $15 at a restaurant. But "affordability" also creates another option for consumers - discretion. We can afford to choose our food based on any whim or conviction that appeals to us. This is why the upper-end market is moving past affordable food to ethical food. That is beginning to change. Over the past several years, as America’s obesity epidemic has become a growing concern, a number of investigative journalists have turned their attention to the industrial food system and its alternatives in an attempt to make sense of what we eat and whether it’s good for us. Eric Schlosser jump-started the genre in 2001 with Fast Food Nation, a portrait of drive-through cuisine and culture that shocked and repulsed readers much as Upton Sinclair’s meatpackingindustry exposé The Jungle did at the turn of the previous century. Michael Pollan’s pieces for The New York Times Magazine and his newly published book, The Omnivore’s Dilemma, push in a slightly different direction, often probing the way government policy influences our diets. Corn subsidies, for example, are so massive that the crop sells for less than it costs to produce, and unhealthy corn derivatives often find their way into inexpensive but not very nutritious processed foods. In a twist of economic irony, the artificially cheap calories in these foods are particularly attractive to poor consumers— who, not coincidentally, have higher rates of diabetes and obesity-related diseases than their wealthier compatriots. [More]In one sense, our food industry should be nervous about the seemingly bullet-proof American economy. As we create more wealthy people, we create more finicky eaters. * About $3500 per head. Thursday, March 22, 2007
Maybe it's something about the chair...
Former Federal Reserve Chairman Alan Greenspan is deservedly famous for two things: cryptic pronouncements that somehow proved all things to all listeners, and easy money. For a while, it looked like his successor Ben Bernanke was going to be another breed of cat. But the recent announcement by the FOMC (short for "Op Loan Interest Rate Czars") was notable in that, in the face of some inflation pressures, the Fed appears to be opting for growth. One succinct summary was part of my advisory message from Roach Ag Marketing (I carefully ignore advice from several quality sources): First, it is not what they did that was important but it is what they said that made all the difference. Fed chief Ben Bernanke basically said that he is more willing to consider the fall off in the housing market and the blow up in the sub prime lending market as a more important consideration short term then inflation. Translation: he is likely preparing the market for the potential for rate cuts in the weeks ahead.These comments line up well with my own take - in itself a scary thought for the author Shawn Hackett. We are already seeing significant ag inflation: rents, fuel, fertilizer, etc. Now that could be matched with modest consumer inflation: food (of course, that's partly ethanol's fault), anything imported (dollar plummeting), and services. I have opined before about fixed-rate penalties for ag loans. As you write loans for the machinery now flying out of dealer lots and land you can now almost pay for, make sure you don't lock in a very expensive unneeded interest rate guarantee. I think Ben's a chip off the ol' block... Monday, March 19, 2007
The trade deficit that wasn't there...
Nobody (including me) is worried about the US trade deficit. One reason is those of us who did worry about it for years have become bored and now worry about other stuff - like global worming. Maybe we don't have to start now, either. The current account deficit - of which the trade balance is the most important part is bad but improving. One reason is people in poor countries send their money here to invest. Because emerging economies' supply of financial instruments is so unreliable, people may hoard more of them as a precautionary measure. Firms and households fear they will not be able to borrow to tide themselves over bad times, therefore they choose to save for a rainy day instead. Because they cannot transfer purchasing power from the future to the present, they must store it from the past. In short, poor countries don't have a whole range of mutual funds and money market accounts and we do. And outside some bad apples like Enron, you can get your money back someday pretty reliably. Another reason our trade balance is improving is our dollar is getting cheaper versus other currencies. This is great for ag because it keeps exports humming and mitigates oil prices (imagine if oil was priced in euros!) After a while, foreign investors may get fed up with getting back less than they invested because of currency fluctuations, but we've been saying that for decades, it seems. The important thing is to make sure other countries don't get their acts together and establish strong property rights laws and credible investment markets to compete with ours. What can go wrong? Wednesday, March 14, 2007
This could get uglier...
Although many on Wall Street are downplaying the sub-prime mortgage swoon, it seems to be growing nonetheless. The trouble is the slide can generate its own momentum. As foreclosures rise, more houses come on the already crowded market, and new groups of possible buyers dwindle. Meanwhile, all those who took it as a solid assumption home prices would appreciate a tidy 4-7% annually are faced with a different business plan. Flipping properties, especially for highly leveraged speculators, could be along time regaining profitability. Could this touch our wonderful little commodity party? I think so, because we have so much "outside" money in commodities tight now. But as to which way - I have no idea. One thought is commodities will look more attractive by comparison, hence funds will keep buying. A second choice is as the Dow declines in response the lost equity will suck up money available for commodity speculation. This seems like a reach given the numbers involved, but the slow-motion meltdown in mortgages is not shrinking. One thing that could be helpful is more pressure on the Fed to lower interest rates to help keep some mortgages going through another wave of refi's similar to a few years ago. We seem to have a pattern in the US now of slow-motion disasters: Iraq, Libby, Britney, the Chief, and now this. I guess we love pulling the bandaids off really slow. Labels: economy Wednesday, February 28, 2007
The risk shell game...
It is convenient to blame yesterday's market turmoil on the Chinese. After all, they are inscrutable, ya know. And to be sure the decision by their "Fed" to curtail irrational exuberance was a key factor. There are also plenty of other factors.
But the rest of the story is perhaps better understood by trying to figure out who is actually at risk now and how much. Not an easy job. One concern is that the heavy wiring in the markets could not keep up with the rapid changes. Another is the rapid growth of derivatives. The problems in the subprime mortgage sector have focused attention on the slicing and dicing of risk using sophisticated instrument such as collateralised debt obligations and credit default swaps. Banks have used these to shed credit risk, but it is not clear where all that risk now lies. Financial shares were hit particularly hard on Tuesday, suggesting that nerves are starting to jangle over this uncertainty. Shares in Goldman Sachs, perhaps the smartest of the financial alchemists, ended down 6.6%. This was partly due to its Asian exposure (it owns a stake in a big Chinese bank). But its role in conjuring up and trading exotic financial instruments was probably also a factor. [More] While farmers are struggling to cope with options strategies, guys in suits worth more than my pickup are devising exotic financial instruments to hand risk around like a hot potato. Tuesday, somebody ended up holding it. To be honest, I have trouble with options strategies. It's easy to misplace what success looks like. Moreover, I am comfortable with the production and price risks as they occur in the real world. While I doubtless could make some money being more aggressive in the use of risk instruments, my guess is it would take utilize time that I can be doing something else more personally or financially rewarding. Just because an action makes money doesn't mean it doesn't have to compete with other choices that offer different or even better rewards. Tuesday, February 27, 2007
So is this equilibrium?...
My goodness, what's going on in China?
Whatever, it seems to have reverberated across to Wall Street. The recent tug-of-war between recession fears and inflation-fighting may reverse today's anxiety tomorrow, but it looks like the stalemate could continue on interest rates. Volatility in major markets triggers efforts to avoid risks. However, farmers often pay too much for fixed rates, in my opinion. My last comparison was 1.25% difference. Assuming a steady rise, rates would have to increase 2.5% over a 1 year operating loan for example, to break even. Today's action shows me nothing that could suggest the Fed ramping up that fast. In fact, another day like this and recession looks closer, with the Fed belatedly lowering rates to spur growth. Could this be affecting corn prices? I dunno. It'd really hard to sort out the spec money actions, let alone predict. But if corn falls too far, a bigger mandate for more ethanol is my bet. US Farm Report host John Phipps surfs the Web so you don't have to...
About Me
Jan and I farm 1700 acres near Chrisman, IL. I have also written humor and commentary for Farm Journal and Top Producer for 13 years. Please visit my website (www.johnwphipps.com) to learn about my speaking services for your group's next meeting. ARCHIVES
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