Time to Stop the Bearish Talk

 
Time to Stop the Bearish Talk

Despite the changing dynamics, the world economy will grow in 2015

Enough of the doom and gloom over agriculture and the world economy. “There’s been a lot of bear talk,” said Bruce Scherr, chairman and CEO emeritus of Informa Economics, at the Farm Journal Forum in late 2014. “I’m not so bearish, and I’m tired of all the negativity.”

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The U.S. economy is, fundamentally, more sound than it has been in the past 10, 15, 20 years, says Bruce Scherr, chairman and CEO emeritus of Informa Economics.

While others fret about $3 corn, South American soybean production and keeping tabs on China, Scherr focuses on the macroeconomic factors around the globe and how they are driving change.

“There are too many dynamics at work today to believe it’s going to be business as usual,” he said.

For example, the world population is growing—along with incomes and standards of living. Combine even small gains in those numbers with lower prices for goods and services, and it creates a “willingness to buy” that results in a significant uptick in demand. Consumers represent only one factor at play.

With crude oil less than $50 in early 2015, energy prices are at record lows. That gives consumers and businesses extra money.

But don’t expect to fill up your vehicles with $2 gas forever. While you enjoy the ride, Scherr suggested considering the bigger picture of record low gas and energy costs and how they will affect the commodity landscape. “What does an $80 crude price mean in the scheme of things? What does $3.50 or $4 corn mean?” he asked. “What will be the consequences for the marginal producers as we move into the next few years?”

Some of those consequences are known, such as low long-term rates pushing up the value of the dollar and raising the cost of U.S. exports. That’s a big deal for U.S. farmers and ranchers who exported a record $152.5 billion worth of agricultural products in 2014, according to USDA. 

The interplay between the U.S. dollar and agricultural exports can create quite the balancing act for the U.S. economy. When the dollar is strong, the Argentine producer is “not planting soybeans, he’s planting dollars,” said Scherr, offering a different way to look and respond to the situation. “If we wanted to inflict pain in terms of our efficiency and productivity to make the South American producer less aggressive and diminish some competitiveness from South America, which is substantial, we’re working against ourselves.”

He sees the same challenge with trade between the U.S. and Europe. “I can’t imagine cheap energy isn’t good for Europe in general,” Scherr said. “On the other hand, as the euro loses value relative to the dollar, the European economy becomes more competitive and less capable of buying imports from us. Who’s our biggest importer: the Europeans.”

Low prices have other advantages, too. In addition to making goods more attractive to buyers, they also put pressure on the less efficient producers, from farmers to manufacturers, and encourage growth and consolidation. As consolidation occurs, the most productive players can win big. 

Scherr thinks a similar shift in consolidation could happen in global agriculture markets on a nation-by-nation basis. “I believe the U.S. will play a role, not unlike the Saudis play in energy, with respect to agriculture in trying to drive the marginal and other competitors out of business and take control,” he said.

Before the U.S. can capture the global agriculture market for soybeans or other crops, it has a big problem to fix—infrastructure.

“Nobody in the world has the capacity and the ability to serve global food needs like the U.S.,” Scherr said. “But our logistics and handling system is woefully inadequate. We have to be able to grow it, elevate it, ship it, feed it and move it around the world.”

Oil, gas and fracking are competing with grain for space on the rails and rivers. Completing all the current and planned construction projects on the 12,000-mile inland waterway system’s locks and dams is estimated to cost a staggering $18 billion. 

The situation hamstrings the potential for U.S. agriculture. “Without the logistics capability, all that productivity will be for naught because we’ll simply pile up domestic inventories,” Scherr said. “If we are going to accomplish this global role of feeding the world on a profitable basis, I think we need more basic infrastructure that will let us ship 2 million or 3 million more bushels [of grain] than we are doing today.”

There are similar opportunities for the U.S. economy in energy. “From the standpoint of everything we have been talking about … you are never self-sufficient unless you can be a sustainable net exporter,” Scherr said. “We can be sustainably self-sufficient, aggressive net exporters across the two main world commodities—energy and agriculture—if we have a strategy.”

Will the world be able to buy grain and oil? Scherr thinks so. Domestically, the U.S. consumer is in good shape. “The U.S. economy, fundamentally, is incredibly sound—more sound than we have ever been in the past 10, 15, 20 years,” said the economist, who believes world leaders will be quick to react to any sort of economic turmoil in the year to come. 

“With my contention that if any economy starts to falter, there will be significant efforts to stimulate it, I look at 2015 as a year of synchronous expansion of all the economies around the world,” said Scherr, who says even slowing growth in China still adds up to tremendous economic opportunity, given the size of its economy.

“Synchronous expansion and low prices and … what do you get?” Scherr asked. “You get a pretty good expansion of demand. More people with greater marginal incomes usually means they—to quote George Carlin—want more stuff.”  

The Forum was made possible by support from premier sponsor Monsanto Company; supporting sponsors DuPont and Verdesian; media partner GW Planet Forward; and Connect partner CropLife America.

For more news and highlights from the Farm Journal Forum, visit www.FarmJournal.com/Forum

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