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Should a sheep now be screaming wolf in 2007?

Agriculture.com Staff 12/28/2006 @ 7:36am

Last year following Christmas 2005 and prior to the new year, I wrote an article entitled "2006: Time for a Sheep to Whisper Wolf?" about the commodity inflation going on in non-grain markets and how it could eventually spill into the grains.

In this article, we brought up the rapid rise in crude oil, metals, and the CRB index and how it was likely to spread into the grain pits sometime in the next few years. Not only would that impact grain prices, but also probably more importantly, both land rents and values. It appeared to be a good time to lock in some long term rent prices and even be aggressive in purchasing land -- even though prices seemed high at the time with sub-$2 cash corn.

How prophetic that article was! While the timing of the start of the grain rally was quite odd (harvest), the signs of the impending explosion in prices was being flashed around as early as last Christmas, with the nearly doubling of the CRB index and explosion in energy prices prior to Jan 1, 2006. Below are some brief comments excerpted from that article:

"For the first time in over 30 years, we see signs of rapidly accelerating inflation creeping into the economy. At the risk of sounding like a sheep crying 'wolf' when it is still very early in this process, we just want to draw your attention to some recent developments that indicate rampant inflation may be just over the horizon. When we say 'rampant inflation,' we mean the type that occurred during the early '70s. That has huge ramifications for long term planning in agriculture, because although times were extremely good for agriculture in the '70s during the inflationary cycle, times were extremely bad in the early '80s shortly after that as we wretched inflation out of the U.S. economy. So we also want to spend some time brainstorming about what types of things occur in that environment, and what to do about them to keep from getting eaten by the inflation wolf (which occurred to so many farmers in the '80s).

The early signs of inflation are already present, some eerily similar to the signs in 1972-1973: 1) a doubling of energy prices in the past 18 months, 2) a breakout of precious metals prices from previous 10-20 year ranges, 3) land values inflating over 10% nationally for the first time in decades, and 4) consumer inflation data figures creeping higher in national numbers (smart economists generally accept that consumer data is usually 'slow' to indicate inflation, while commodities are 'fast.' 5) inflation expectations entering financial discussions, and 6) Signs that the most prosperous and aggressive farmers can no longer compete at current price levels with new, higher input costs.

If we are in a beginning period of rapid inflation for the next 4-5 years, the world financial markets (and ag markets) will be in for a wild ride the next few years. That means a greater respect for market ranges is needed for all commodities/goods/real estate, along with a healthy dose of history on how markets react in this environment, and why.

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