John Phipps: Money is No Problem

07:16AM Dec 18, 2018
In our microeconomic climate of thin margins and often puzzlingly high land prices, having a clearer picture of the global wealth and who holds it can help explain, if not comfort.
( AgWeb )

With the ag sector looking at projected income losses of 12% for 2018, with almost no commodity escaping the trend, producers cannot be faulted for projecting their financial situation on the whole economy. Partly this is due to our exaggerated estimate of our share of the U.S. economy (less than 1% of GDP). Creative economic perspectives, such as counting the entire food sector as “agriculture” when the reverse makes more sense, leads many farmers to intuitively feel our gloomy forecast has real impact on the 98% of America with no immediate connection to farms.

Value-added to GDP by agriculture

Most of us, however, grudgingly acknowledge a national economy much stronger than our small corner. For almost a decade GDP and incomes have steadily if unspectacularly chugged upward. In the same way, we can remember, if pressed, the remarkable farm sector boom while the rest of the economy struggled through the Great Recession.

This self-centered worldview frequently creates a blind spot that hampers our ability to grasp the nature of the world’s wealth. To be fair, the scale of global wealth puts it almost beyond comprehension for anyone.

There are no helpful images or metaphors to help us understand numbers with 12 or even 15 zeroes. Psychologists estimate we can only imagine about 4 things at once, so evolution hasn’t helped us much with this mental task. Nonetheless, an overview of global wealth can help frame our expectations for economic events on the larger stage and how it might trickle down to our farms.

Credit Suisse totes up the numbers each year. At mid-2018 total global wealth was $317,000,000,000,000. (The zeroes soon become numbing so: $317T)

Total Global Wealth

In this Really Big Picture notice 1) how relatively modest the Great Recession was for the overall global trend, 2) the importance of growth in NA and China, and 3) the increasing portion of global wealth outside NA.

The same problem faced by astronomy or computer design – big number overload – can be tackled with comparisons to add perspective for individuals. For example, farmers could anchor their comprehension to the value of all U.S. farmland: $2.7T – less than 1%, in an odd coincidence.

Diving deeper, how much of this wealth is easily available? Liquidity – the ability to be converted to another form – can be a slippery term, but a good rule of thumb is wealth seems to be split about 50-50 between tangible forms (real estate, commodities, etc.) and financial assets (stocks, bonds, cash, etc).

Global Trends - Assets and Debts Per Adult

The U.S. and Japan are more heavily weighted toward financial assets than other countries. One possible implication is the longer the expansion continues, the more wealth that could easily fund investments of any type, and farmland in particular. There is an enormous stockpile of near-cash available to capitalize on value opportunities like a plunge in land values, greatly decreasing the chances of a price collapse.

Another interesting aspect of the global wealth is women’s share. While hard to determine exactly, a reasonable estimate is 40%.

“Hard evidence is more limited than might be expected given the interest in the topic. Household wealth surveys frequently fail to record which family member owns a particular household asset: and, in any case, the nominal ownership of a particular asset may differ from the way ownership may be viewed if a couple divorce, for example. Bearing that qualification in mind, we estimate that women account for about 40% of global wealth overall. Their share of wealth rose considerably during the 20th century, and women’s wealth levels have risen along with all household wealth since the year 2000. However, it is not clear that women’s overall share of wealth has continued to rise in this century. On the other hand, there is some evidence that the representation of women – particularly self-made women – has been rising in the last 5–10 years at the very top of the wealth spectrum. In addition, women’s share of wealth has almost certainly been rising in Asia due to the rise of China, where women have a higher wealth share than in the rest of the region.” (Credit Suisse 2018)

Some particular trends seem clear. For example, the global growth of women’s wealth is largely driven by Chinese women. Second, among millennials, women are doing better than men, likely driven by more education and employment in lucrative services – health care, education, etc. Overall, women tend to be more risk averse than men, choosing real over financial assets.

This suggests even more farmland owned by female non-farmers than is already the case. Not simply by inheritance and longevity, but investor choice. Women comprise 37% of the principal landlords today.

Indeed, one of the more curious possibilities arising from the sprawling “food movement” roiling our industry is an intuitive attraction for women to farmland as an investment, regardless of personal background, directed by the same values as choosing free-range eggs. And they will have more than sufficient means to do so.

In addition, the huge and rising proportion of the wealth at the top empowers individuals to make a huge splash in the small pool of farm assets. Some people could buy acres with essentially pocket change. We are one fad away from outside investors dominating farmland sales, something that has happened sporadically before, but now could be fueled by vaster resources.

Ben Bernanke famously introduced the concept of a “savings glut” in 2005. The idea of excess liquidity still challenges farmers struggling to make mortgage payments, but whatever the name it is very real, very large, and very universal. In our microeconomic climate of thin margins and often puzzlingly high land prices, having a clearer picture of the global wealth and who holds it can help explain, if not comfort.