Last year we published a report titled A Look Forward in an effort to try and help prepare our readers for challenges that we believe American agriculture will be facing in the decades ahead. To a certain extent we could have titled this piece "A Look Back to enable us to Look Forward" as what we believe is in front of us is realistically a replay of pervious periods; while all long-term cycles will carry their own uniqueness, there are certain patterns that seem to play out time and again. In light of what has occurred now with the 2014-growing season, it seems fitting to review what we wrote about last year. This paper was written in four parts so beginning this week and running for the next four, we bring you once again A Look Forward.
I began my agricultural career back in the mid-to late 1970’s. It was a precarious time in the world, as we were still in the throws of world-wide concerns over food production and population growth. You did not have to look far to find Malthusian[i] predictions about mass starvation in the not-too-distant future. Considering we had just emerged from a series of crop problems created by both adverse weather and disease issues around the world, it was not a stretch to envision how there would just be too many mouths to feed. In 1974, the United Nations held a World Food Conference in Rome to discuss the situation. At the conference, then Secretary of State, Henry Kissinger, stated that within a decade no child should go to bed hungry[ii]. "Plant fencerow to fencerow" became the mantra of the day, and world agriculture responded by increasing production in just about every hemisphere. Indeed, even before these concerns had arisen, had it not been for the pioneering research efforts of individuals such as Dr. Norman Borlaug [iii] in the 1950’s and 1960’s ushering in the "Green Revolution", there would most certainly have been numerous instances of mass starvation in places like India and Africa.
It’s funny the things that are remembered generations later. I have always found it a bit curious that Thomas Malthus is identified with dire predictions of mass starvation. In fact, he was basically just analyzing demographic trends in population. His theories predicted that trends in population would tend to increase at a faster rate than trends in food production, creating disruptions and the need for adaptation, i.e. lower birth rates, increased use of land, etc. The fact that the world had not already starved was a testament, or verification really, to something else at work. What changed? Refer to it as Adam Smith’s "invisible hand" or economics 101: we humans respond to stimulus and incentive, and the global agricultural community stepped up to the plate and increased production. As a student of the markets coming in at such an exciting time, I was hooked.
It was in the 1970’s that I developed an interest in cycles. It only stood to reason that with the ebb and flow of world grain production we would experience periods of glut and shortage, and price movement would reflect the need to increase or decrease production. To further my education, I was introduced to the writings and research of individuals like Russian economist Nikolai Kondratiev and W.D. Gann who believed there were natural and somewhat predictable patterns that unfolded over time. Though I knew that I could never embrace the more esoteric ideas particularly of Mr. Gann, this research instilled in me a hunger to learn more about the natural cycles or rhythms that appear to influence us in many ways. And so a lifelong search for more information ensued.
Along my quest to find and share knowledge, I have encountered many reactions to the idea of cycles. The imprecision of cycles is one of the basic problems that many people experience with the topic of cycles. What good is something if the best you can expect it to do is an occurrence within a 3-year time window? Additionally, some argue that as civilizations and technology evolve, we will render these swings either useless or ineffective. But try as we might, we humans cannot control everything, particularly not human nature or the weather; an endless source of frustration for many. While learning about cycle does not allow you to control the events that could occur, ideally it will at least provide an advance warning or way to prepare. As such, even though no pattern or event unfolds the same way each time, I believe looking at past cyclical patterns can give us insight into current and even future events.
This brings us to the most common question—where in the commodity cycle might we be today, and more importantly, what might we be looking for in the not-too-distant future? In general, commodities, and particularly agricultural commodities, appear to have an approximate 30 year cycle of advancing into new highs. This pattern or cycle appears well defined on this price chart of December corn futures that extends back to 1899, with major peaks in 1919, 1947, 1974, and then most recently in 2012. Specifically with the most recent peak, commodity markets as a whole began to rally soon after we entered the 21st century with a culmination in 2012. Of course, the prices of agricultural commodities are not the only thing to advance or inflate during these advances as all commodities accelerate including energy and fertilizer. Ultimately this also translates in the land costs and other input expenses. I am not sure if this is a case of the dog wagging the tail or the tail wagging the dog, but ultimately when prices level off, profitability is once again squeezed. For many on the production side of the business, the return on investment reverts to levels no better than prior to the price advance, but with risks higher as we now must commit more capital than before the move.
Each and every time this has occurred, there will be those exclaiming that we have entered a new era and that the prices for commodities will continue to rise to ever higher levels. The reasons are many, take your pick: there is not enough land and/or water available, we are not increasing productivity, or the old Malthusian prediction that population growth is outstripping the capacity to produce food. Now, I certainly do not have the foresight to predict whether there will be a day when one or all of the above scenarios comes true, but I believe that at this point in history they are misdirected once again. Unfortunately some of those who have bought into the story will end up paying a financial penalty as we adjust and rebalance to new price structures.
Even though cyclical patterns may not predict the exact day to buy or sell, I believe ignoring their importance is folly on behalf of the producer or consumer. As I have commented previously, recognition of a possible forthcoming event can potentially provide us the blueprint to take appropriate measures in our overall business plan. This is not meant to come across as some type of doomsday scenario where you need to hunker down in a fallout shelter with bottled water and freeze dried food, but rather lay out a plan to deal with tighter margins of return and less forgiving conditions for those who are not prepared.
In the following segments of this series, I will be exploring further the swings the agricultural community has faced in the past relating to land, price, and production. Finally, I will explore the tools you will need in your arsenal to prepare for the years ahead. I hope you’ll join us.
[i] Library of Economics and Liberty. (n.d.). Thomas Robert Malthus. Retrieved from The Concise Encyclopedia of Economics: www.econlib.org
[ii] Thurow, R., & Kilman, S. (2009). Enough - Why the World's Poorest Starve in an Age of Plenty. New York, New York, USA: Public Affairs.