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?
4) 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.