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12 Things Farmers Need to Know About the World

Geopolitical strategist Peter Zeihan helps ag industry leaders understand how the realities of geography, populations, and politics impact markets and economic trends. He recently spoke to an executive summit of Midwest farmers sponsored by Farm Credit Services of America. Here are 12 of the main questions and concerns he addressed.

1. How will the current U.S. political unrest affect us around the world?

PZ: Our two-party political system is currently off line, and it will take a decade or more to rectify. The last time something like this happened it took the Great Depression and World War II to change it. For the next decade, our political system, at best, is on cruise control.

However, the U.S. can survive a globally devastating economic policy. Only 8.5% of our GDP came from exports last year, the lowest in the world, and it’s a number that’s going down as our economy becomes more and more domestic overall.

The famines that are going to be the norm in the rest of the world won’t reach us. The U.S. doesn’t care, not because we are ignorant or mean, but because we are insulated. The greater Midwest is the largest chunk of arable land on the planet. The greater Mississippi system is the largest transport system in the world. These are things that are immune to politics. Decades of bipartisan effort has failed to screw this up, and it’s not going to get screwed up in the next four years.

U.S. farmers are going to be OK. The rest of the world, not so much.

2. How would you summarize the world economic situation?

PZ: The Brazilians are giving you a run for your money in agriculture, the Chinese have largely taken over the industrial manufacturing space, and the Russians are showing that you can export instability.

3. What should farmers know about world populations?

PZ: India has a consumption-driven economy because people who are young are buying cars and houses, raising kids, and going to college. It’s all about consumption, but their incomes don’t match their needs, so they have to borrow. High growth, but high debt.

South Korea is a mature system, with a lot of people in the mature worker demographic. This leads to a different economic structure. Workers in their 40s and 50s are incredibly productive, but there is not as much consumption going on, so you have to be wired into the export network. Without exports, South Korea would collapse as a culture because it can’t consume everything it produces, so that leads to deflation.

Japan is the world’s fastest-aging society. Its goal is to just keep its head above water. The country has so many retirees absorbing so many state resources that keeping the rest of the system going is almost impossible. The only way it has found to maintain a modern economy is:

  1. Robotics
  2. Export as much of the industrial base as possible 

The Russian population is dying out and will cease to exist as a nationality in 50 years. If the country doesn’t secure its borders now, it will lose the opportunity. Ukraine is just the first step.

4. What about populations in the U.S.?

PZ: The oldest millennials are 37 with two kids, and 45% voted for Trump. The two biggest liberal generations, the baby boomers and the millennials are descending into narcissism at the same time. For boomers, that is a normal part of the aging process, and they will cease to be a major voting block by the 2030s. The millennials will be the dominant voting force in this country until the 2060s.

The baby boomers are the largest generation in American history, and they have made the country capital-rich. But all that money is chasing the same number of opportunities. The baby boomers are investing their money madly, hoping to get that magical extra 1% of return before they retire. This has encouraged them to put their money into things that, in retrospect, probably weren’t the best idea, such as Enron and subprime mortgages.

By 2022, the majority of boomers will have retired. They are going to liquidate all those investments they had. It’s going to turn from cash and bonds to T-bills. They are not going to be paying taxes anymore. They are going to be drawing from the system in Medicare, Medicaid, and Social Security.

Guess who gets to pay for that? The Gen X’ers will have to fund the retirement of 75 million boomer retirees. And the X’ers won’t be able to outvote the boomers until they are in their 70s.

Gen X is the smallest generation in American history. Their problem is relative size. There aren’t enough of them compared with generations above and below. Today, this is working for them because all the baby boomers’ capital has pushed down the cost of borrowing. Gen X’ers have been able to finance their debt for terms that are historically unprecedented.

Gen Y, also known as millennials, with all their craft beer consumption, have kept us out of recession for the past three years and probably will for the next decade. When they mature, they will fix the tax gap in a way that Gen X never could, so there is a light at the end of the tunnel. The light at the end of the tunnel is a millennial with the new gadget.

If you look at the developed world without the U.S., it’s basically the shape of a giant old folks’ home. This is why we are not seeing inflation, because we are already in a giant deflationary spiral with no escape. The U.S. is the only advanced country that is anywhere near population replacement. It’s the only advanced economy that has an inflationary base to it. So, everyone around the world is printing currency like mad to try to keep the abyss away. We are the only country with a structure that might generate success.

5. Has the U.S. achieved oil independence?

PK: We are close. The shale revolution has utterly remade the U.S. The breakeven price of shale is now below $45 a barrel. As new technologies, such as water tanks and multilateral drilling, become common, we are looking at a breakeven price of shale below $30 a barrel in 2019. The U.S. is now a net exporter of energy. Our policies are starting to reflect all of these changes.

6. Is there trade potential with Cuba?

PZ: The most interesting country on the trade map is Cuba. It’s only 11 million people, but it’s 11 million people who until now have been absolutely unable to access American agricultural markets, which they desperately want to do. If we were to normalize relationships with Cuba, the country would buy absolutely everything from you. It would come at a small cost, the sugar industry, because Cuban sugar is far better than our sugar beets in North Dakota. Sorry North Dakota, but I’m sure all your corn, soy, and beef producers would have no problem stabbing you in the back to get access to Cuba.

Cuba is a captive market – yours for the taking. It’s growing, it’s strong, and everything is in place. Cuba sits at the mouth of the Gulf of Mexico, so having a strategic relationship is absolutely essential. Cuba is an upwardly mobile country, and they love beef and pork. If you are into an expanding market, Cuba is a very large, low-hanging piece of fruit.

7. Ag is suffering from a labor shortage. What is the answer?

PZ: There is not a lot of migration from Mexico to the U.S. anymore. It has been net negative for eight years running. Mexican living standards have tripled in the last 20 years. Most of the people coming for seasonal ag work are from Central America. The most Central Americans who are going to be available for ag are available right now. It’s a decreasing pot of people from now on. So regardless of what happens with the immigration debate, regardless of what happens with the border, if you are dependent on imported labor, you are going to have to either find another source or replace labor with robotics.

If you are going for another source, you have to go to a country that is in civil uproar. That means African indentured servants or Syrian refugees. Otherwise, switch to robotics, because one way or another, the system that has been in place for the last 40 years is going away for lack of people – not just here, but in places where we reach out to recruit.

8. You mentioned world famine. Why do you see that happening?

PZ: American trade policy since World War II made international maritime shipping both safe and cheap. Remove American strategic overwatch and that transport reverts to being expensive and dangerous. As most countries are dependent upon international supply chains for inputs like fertilizers and pesticides and cannot produce these inputs locally, we’re looking at nothing less than the breakdown of the global agricultural system.

Catastrophic, continental-wide famines are in our very near future. I know that sounds horrible, but it is quite possibly the best-case scenario for U.S. farmers. The American agricultural supply chain is almost wholly national. You are the remaining producers in the world who can deliver the goods to the end market. This will be the greatest agricultural expansion in history, and you are almost all alone in benefiting from it.

9. Besides the U.S., who has potential to expand in agriculture?

PZ: There are only five other countries, besides the U.S., that can increase ag output substantially.

  1. Australia will expand primarily in wheat and high-end beef.
  2. New Zealand, which has tripled its output of dairy in the last 25 years, could bring in American dairy techniques and triple its output again in the next 25 years. This tiny country is the world’s number five beef exporter, and those cattle are just a side effect of their dairy industry. One of these days, it’s going to occur to them that they could have a cattle herd for beef specifically. When that happens, the international beef market will turn inside out. Anything the country produces has to be exported. New Zealand is the player to watch.
  3. Myanmar has been in dictatorship for 70 years but is opening up trade for first time in years. It has great land for rice and a river right down the middle of the country. Myanmar is the player to watch in rice.
  4. Argentina has great infrastructure, is self-sufficient in energy, and has productive land. Farmers there can grow a little bit of everything.
  5. France has similar benefits as Argentina.

Outside of these five countries and the U.S., everyone else is going to be lucky just to hold still in ag output. You have to be able to access energy, have positive demographics, have infrastructure, and no internal security issues.

10. What about China?

PK: China absorbs massive amounts of raw material from around the world and is dependent on exports for finished goods. If the maritime supply chain breaks down, it can’t get raw material in or exports out. China, as a unified entity, is in its final years. It is likely to fall into dictatorship. This is already having a chilling effect on the investment community in China.

11. What about Brazil?

PZ: Brazil isn’t like the Midwest. The agricultural land is all in the interior. Its transport costs, based on where you are, are four to 100 times what they are in the U.S. The rivers just don’t work for them. Also, much of the ag land is converted from tropical savanna. It has a very low nutrient quality, so the farmers need to fertilize three and four times as much as we do in the U.S. The country never has an insect kill in the winter (because there isn’t a winter), so the pesticide use is extreme. Producers have to switch pesticides every two to three years as opposed to every 10 to 15 in the U.S. In terms of input, Brazil has the highest cost agricultural land in the world.

Brazil only makes sense in a world of cheap capital, insatiable Chinese demand, and free and safe international transport. All that is going away. There is a massive flip coming in South America as Brazil crumbles and Argentina rises. What we are seeing with the political craziness right now is just the leading edge. Argentina won’t replace Brazil because it doesn’t have that amount of land, but it is certainly on the upswing.

12. Should we worry about global warming?

PZ: I’m green. I have solar panels on my house and drive a Prius. The science is pretty clear on global warming. The challenge is figuring out the pace, intensity, and locality. Let’s assume we get a moderate change that heats up the atmosphere and raises sea levels by a little bit. Crops grow in latitudinal bands around the world, such as the Corn Belt in the U.S. If you shift the band, agriculture gets pummeled because you don’t have the infrastructure in place. If you shift the Russian Wheat Belt 2° in latitude, all of a sudden Russia becomes a food importer. Disaster happens. Same in Argentina. Even worse is rice. In China, a slight change shatters the food-production system.

One place in the world that’s the exception is the Midwest because it’s round. You can move the crop bands one way or another and you might grow rice where you grew wheat, or you might grow soybeans where you grew corn, but the infrastructure is in place. The towns and the rivers are in place. If the climate changes enough to hurt the Midwest, the rest of the world is already a wasteland. You may be looking at a catastrophic hit on agricultural zones around the world except in the U.S. We totally win on global warming.

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http://zeihan.com

 

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