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A World View on Agriculture

February 29, 2012
By: Ed Clark, Top Producer Business and Issues Editor

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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.

p20 A World View on Ag   Chart1


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.

p22 A World View on Ag   Chart2


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.

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FEATURED IN: Top Producer - March 2012

 
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COMMENTS (2 Comments)

Ric Ohge - Belmond, IA
How this ultimately affects Corn Futures, will depend on how strategically we can manipulate it....yes, I used the "M" word. Commodities are in a constant state of manipulation-I can't be the only one that knows that. In this case, there is one all-important inter-related set of "givens". First, Chinese society is far from equal-that's not a knock on their Governance of this specific situation-it's a fact THEY know they have to deal with. They've gotten the Rural West used to crazy things like utilities, eating meat, not starving-stuff like that. Once you have a group that large on what they believe is the "Gravy Train" taking them to a Lifestyle similar to the affluent East, that train best not leave the tracks for any reason but a global meltdown that takes EVERYONE with them. Otherwise, you have the Chinese Number One-With A Bullet National Bugbear, Social unrest, or in the form the Chinese are more apt to play it, Revolution. All Reports aside, these factors are likely a bigger determiner in the Commodities Outlook as it relates to China. So...how can we manipulate it so the Chinese don't go-well, Chinese, but the American Farmer gets better endgame position? So, that said (this comment was also starred on another blog-but without this addendum), might this put us in a position to "help them", not with handouts, but with American firms and technologies helping to solve their huge infrastructure issues? We must at least consider the reality that a falling China is no more good for us that a falling US is for them. What's been happening behind the curtain while we've been entertained by the "Big Banks & Corporate Political Circus Money Laundry" is that the real working economy has been getting more globalized.
12:34 PM Mar 12th
 
Ric Ohge - Belmond, IA
How this ultimately affects Corn Futures, will depend on how strategically we can manipulate it....yes, I used the "M" word. Commodities are in a constant state of manipulation-I can't be the only one that knows that. In this case, there is one all-important inter-related set of "givens". First, Chinese society is far from equal-that's not a knock on their Governance of this specific situation-it's a fact THEY know they have to deal with. They've gotten the Rural West used to crazy things like utilities, eating meat, not starving-stuff like that. Once you have a group that large on what they believe is the "Gravy Train" taking them to a Lifestyle similar to the affluent East, that train best not leave the tracks for any reason but a global meltdown that takes EVERYONE with them. Otherwise, you have the Chinese Number One-With A Bullet National Bugbear, Social unrest, or in the form the Chinese are more apt to play it, Revolution. All Reports aside, these factors are likely a bigger determiner in the Commodities Outlook as it relates to China. So...how can we manipulate it so the Chinese don't go-well, Chinese, but the American Farmer gets better endgame position? So, that said (this comment was also starred on another blog-but without this addendum), might this put us in a position to "help them", not with handouts, but with American firms and technologies helping to solve their huge infrastructure issues? We must at least consider the reality that a falling China is no more good for us that a falling US is for them. What's been happening behind the curtain while we've been entertained by the "Big Banks & Corporate Political Circus Money Laundry" is that the real working economy has been getting more globalized.
12:34 PM Mar 12th
 



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