I’ve been on the road talking to producers again this winter. In general, they seem to be happy with the way things have gone for them during the past few years, but they are starting to see storm clouds on the horizon. They wonder how aggressively they should defend their expected 2012 and 2013 production or, to put it another way, how aggressively they should expand.
To gain some perspective on the future, it’s necessary to move beyond the simple supply and demand of the ag commodities and focus on the big-picture fundamentals that will drive the domestic and global economies. Hopefully, by developing a better understanding of the macro forces, we can prepare for the shocks and opportunities that lie ahead.
An economically strong country rests on four fundamental pillars:
1. Natural resources and a good climate to produce crops. The U.S. is blessed, along with a few other regions of the world, but we are one of the strongest.
2. An established river and/or transpor-tation system to move products from production to usage areas. The U.S. has the biggest river system in the world, as well as a mobile interstate system that can move products.
3. A stable labor pool.
4. A source of energy. The world has found enough energy to enable the industrialization of the U.S. economy. Moving from a wood-based energy economy to a petroleum-based system allowed tremendous growth in the mechanization of industry, transportation and agriculture, which all helped the U.S. raise the standard of living to the highest level in recorded history.
The U.S. has been blessed in almost all areas to become the superpower it is today. The issue now is, where to next?
In light of the changing financial structure, there are several macro fundamentals that I
believe will cause major uncertainty in the future. It’s important that farmers understand and factor them into their pricing decisions.
The labor pool is changing in the U.S. and other industrialized countries such as Japan, China, Russia and countries in Europe. The baby boomers are retiring or close to it.
This shift has two impacts: the econ-omy is not getting as much stimulus and the government is not getting as much tax money.
Where will the increased consumer spending come from to generate the tax revenue needed to pay for the large number of people demanding more government resources? Will the government be able to stimulate investment in the economy, which desperately needs to grow tax revenues?
What about all the discussion of the world population doubling by 2050? The growth in population is not happening in the countries that have the best natural resources, such as the U.S., Brazil, Argentina and Russia. It’s occurring in concentrated production regions such as China, India and South Africa.
Will these new consumers have the money to buy the natural resources that must be imported? As these countries strive to acquire natural resources, how will the more advanced economies react to having their standard of living put under pressure?
A classic case is the rally in gas prices. We have gas and diesel in the U.S., but it’s being exported to Asia because it is willing to pay more. Politicians could react and put up trade barriers. While this would be helpful in the short term, it could be a disaster if it impedes money from flowing back into the U.S. as a retaliation against trade restrictions.
We are also experiencing challenges to our energy supply that will make it difficult to keep an industrial society running. Washington is against ethanol and biodiesel. The simple fact is that global petroleum supplies are not infinite and once they start to decline, economists suggest, they will drop fast. To avoid major human suffering, the market will ration usage and raise prices to levels where new supplies or other fuels will be created. As a result, new economic prosperity will unfold. While I believe necessity is the mother of invention, the transition period could be violent.
Promises that don’t deliver. Another big factor that affects our macro-economic health is the political logjam that’s developing in all aspects of government. Policymakers are at a loss as to which way to go in the new global economy. I don’t profess to have any answers other than to allow the market to work. If we make the U.S. the most profitable and safest place in the world to invest, money will flow like water into our country.
Unfortunately, the assumption that the U.S. will continue its growth spurt enticed government at all levels to promise more than it can now afford. I think it would be easier for government to increase taxes and go to war than reduce spending.
Subsequently, once politicians raise taxes, which will essentially dilute the economic growth rate and actually reduce tax revenues, they will be faced with tough decisions about cutting spending. They might be able to cut the rate of growth, but hard-core spending cuts will not be made because of their major short-term effect on the economy. The only alternative left is to inflate!
At Farm Journal’s Profit College in early March, I outlined the practical steps producers should implement to take advantage of the primary forces that impact agriculture. While the issues are huge, we have already taken the biggest step: accepting that these issues exist. The next step is to urge elected officials to start operating in the best interest of the country rather than their own best interest. The final step is to implement plans at all levels of government and the private sector that help to ensure our children are left a better country than we were given.
10 = Excellent sales opportunity
1 = Excellent buying opportunity
If planted acres exceed 94 million and yield moves back to 162 bu. or better, cash values will drop below $4.25 this fall. I strongly suggest scale-up sales starting this month to at least half sold and be done by mid-June. If a summer weather event does occur, look to sell expected 2013 production if September corn exceeds $6.50 to $7.
This market kept new crop prices strong to assure that at least 1 million more acres are planted. I still believe, with normal yields, the odds are better than 70% that we will see carryover drift back to 400 million bushels. This should push cash values down to $10.50 this fall. I still suggest that you sell soybeans off the combine at $12.50 to $13 basis the November soybeans.
The wheat market is on its seasonal decline into harvest. Unless there is a major summer weather event in corn and soybeans, the ability to rally wheat is limited. Downside risk is in excess of $1.50 and upside potential will be less than 50¢ from current values. If wheat is not priced by late March to early April, producers will be forced to store it off the combine and hope for a price bounce into winter.
Cattle and Hogs: 6
While cattle and hog prices are at record highs, the problem is not supply; it is consumer demand. The economy is experiencing some price improvement, but I believe it is false growth. We could easily see some negative price activity in 2013 that could drive consumers back into a defensive position. Subsequently, cattle and hog producers should look at placing floors under the market for the spring and summer of 2013. The other factor to focus on is taking advantage of a fall sell-off in corn and meal values to make most expected 2012 purchases and look hard at 2013 pricing if corn and soybean prices move below the cost of production from August to October.