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1970's all over?
Are we on the verge of an agricultural boom? Or a bust? That seems to be the
question asked at the National Ag. Bankers conference this week.
Some of heavyweight ag economists such as Barry Flinchbaugh (Kansas), Mike Boehlje
(Purdue), Daryll Ray (Tennessee), and Neil Harl (Iowa State) provided their
take on agriculture's future. "Tell your farmers to enjoy their prices," Barry
Flinchbaugh was quoted saying. "I've been in four 'new eras' for ag in my life,
and none of them lasted." "I really fear a replay of the 1970's, if ethanol
loses steam," Neil Harl said.
Mark Pearson of Market to Market, said, "These are
Disneyland price levels... take a deep breath and enjoy the air, because they're
not going to last."
It made me think of a quote I heard this week from a highly respected customer:
"Lots of men know what to do, but few men know when to do it!" I think at no
time is that more true than today, as we assess today's commodity markets. I
don't believe it's a question of whether or not we will have a boom, followed by
a bust. We already have a boom! But instead, how long will the boom last, and
when will the bust occur? This is the multi-billion dollar question, with
almost all financial management strategies (grain marketing, farm expansions,
land rental rates, land and machinery purchases) for the next 10 years depending
on this assessment of timing.
How long will good prices last in this current marketplace? Right now, we have
2008, 2009, and 2010 harvest futures prices for corn at $4-$4.20, wheat at
$6.50-$7, and soybeans at $9-$10. Currently, then it seems, the market believes
it will last some time - in fact, longer than any other boom cycle or false "new
era" that Flinchbaugh talked about. If you believe it won't last, then you
should have 3 years of commodities sold. If you believe it will get better, you
should have nothing sold at these price levels.
There are lots of comparisons to the 70's besides Harl's, perhaps the most
compelling made by Chief USDA Economist Keith Collins in fall 2006. USDA's 10-year projections last Feb 2007 seemed to confirm this idea, with high prices
projected for the next 10 years due to the biofuels explosion.
There are some compelling similarities to the 1970's:
1) Crude oil prices
exploded in similar fashion to the 70's.
2) World stocks leading up to the 70's
looked awfully familiar to today's situation.
3) Exports exploded then just as
wheat exports exploded the past 4 months. Is corn/beans far behind?
USDA's Collins has made the most compelling case comparing biofuels demand to
the 70's-type demand bull, and he certainly has information available to him
that many do not.
5) Funds also seem to see the similarities, with commodity
values shooting sharply higher.
In years where we have a short crop one year causing a large price rally (such
as almost every rally from 1980-2005), price spiked up one year, followed by a
big decline the next. This boom already looks different and more like the 70's
boom which lasted multiple years, with the boom from 1973-1981, and the bust
from 1981-1987. This is a much longer time frame than other rallies, so this
might last longer than most people believe.
Never, in any previous rally the past 30 years, did we have the chance to sell out
3 years at such high prices! If you believe this is like most short crop years,
you would want to sell the next 3 years (or more) crop at current offers. If
you believe it's like the 70's, you would want to wait a few years before making
those multiple year hedges. The difference could be immense, so the right
decision is paramount.
Land rental bids also are drastically different, if you believe current prices
will end quickly, or last 3-5 years. While my bet is that top bidders today
will be rewarded for their aggressiveness (due to rising prices the next 3-5
years), apparently many bankers and ag economists disagree. Guys busting out
CRP land are the guys that believe current prices will last or improve, and they
may very well be rewarded for their effort. In essence, knowing when to be a
risk taker and when to not take risk is all dependent upon your outlook for the
next few years. Those who are risk takers today, but become very conservative
in about 4-5 years might be the 'few men who know when to do the right thing'.
In 2006/07, land values were up about 14% nationally. This looks similar to
1972-73, with an acceleration of appreciation from the previous year. If
similar to the 70's, 2008 land values should be up about 25%, 2009 and 2010 up
33%, 2011 up 20%, 2012 up 8%, finally followed by a series of land value
declines that could take up to 6 years to lose about 40-50% of value back again.
Is it possible? It was in the 70's (boom) and 80's (bust).
In the Bible, it says there is nothing new under the sun. Certainly today's
similarities with the 70's is eerily familiar. While the current ag boom could
be similar to the 70's, there also could be some significant changes that might
be difficult to predict. Perhaps the funds had it right when they just bought
everything (corn, wheat, soybeans). So far in 2007 through mid-October, corn
prices were down 6%, wheat up 70%, and soybeans up 43%. So while funds lost
money on corn this year, they've made a huge return on soybeans and wheat.
Overall, their averages are good as wheat/soybean profits more than made up for
corn losses (and corn was their big hitter in 2006). Even oil prices are up 44%
in 2007. Owning everything might work better than trying to pick the commodity
with the best return because it's so hard to predict which one will be in short
supply in the future. Last January, almost everyone believed corn would be
short, and today due to larger US acreage, it is the commodity most in surplus.
With everything tight for 2008/09, it’s hard telling what crop might end up short
the coming year.
So the agricultural hangover discussed at the National Ag. Bankers conference will
probably occur at some point, the real question in my mind (and yours) should be
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Are we on the verge of an agricultural boom? Or a bust? That seems to be the question asked at the National Ag. Bankers conference this week.