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Ag Remains Strong U.S. Economic Sector, Analyst Says

For prices, demand needs to catch up with supply.

The current economic strength could prove to be a short-term high for investors, while the biggest recipients will be wealthy people and corporations, one market analyst tells Agriculture.com.

Ron Insana, a CNBC contributor and a scheduled speaker at this week’s Land Investment Expo in West Des Moines, Iowa, spoke with Agriculture.com Wednesday.

While addressing everything from tax cuts, the stock market, the economy, and the realization that the U.S. farmer has faced diminishing returns in recent years, Insana says the positive side is increasing global demand for U.S. ag products and cheaper food.

Agriculture.com:  How closely do you watch the ag commodities markets? Profits have been bleak in the last four years. Is there any kind of daylight ahead?

Insana: Well, it depends what bleak means. When you’re talking about pricing, you know certain prices have not accelerated like they have for other commodities such as base metals or oil or crazy things like bitcoin. Agricultural commodities have been under pressure, not for lack of demand, but for excess supply, really, in a lot of cases. So on the one hand that’s a good thing. If global demand were to start catching up to supply, you’d see prices normalize again. But, in a weird way, agriculture is one of the strongest sectors of the U.S. economy, insofar as we have an agricultural trade surplus, broadly speaking. There is some accelerating competition from Brazil, and Russia when it comes to things like wheat.

I think it’s kind of a double-edged sword. I mean, food is inexpensive and in great supply. In some sense, it’s very good for the world economy because now more people can move out of a state of malnutrition. It’s just that demand isn’t quite strong enough to meet supply, so we’re seeing downward pressure on prices. If we don’t have a weather market at some point, like we haven’t had for a couple of years, that alters the balance, and then you get a drop in agricultural commodity prices.

But, generally speaking, the world is producing a lot of food – the U.S. in particular, and that puts downward pressure on prices. It’s a good news-bad news scenario, and agricultural commodities just don’t behave like tin, aluminum, zinc, steel, or oil. When the global economy gets really hot, those truly economically sensitive commodities drift to the upside, and ags kind of do what they do based on a lot of supply.

We have a lot of stuff. We have a lot of chickens, cattle, corn, soybeans, and wheat. There’s been no shortage for quite a number of years.

Agriculture.com: The other part of the ag market is the fact that outside investors, the funds, are holding big net-short positions. Can the funds hold this grain market hostage with these net-short positions?

Insana: When you look at equity investors, particularly those who are almost solely focused on stocks, unless they are really broad kind of a macro fund, they’re not hedging equities with agricultural commodities. This is not the way they operate their shops. Large commodity trading funds (CTAs) might be net-short ags and might be long other commodities based on the differentials between economically sensitive commodities and ags, which have different characteristics.

But somebody who’s long equities, particularly in a traditional hedge fund, is not long equities and short commodities. They have some very specific insights about why they might be short commodity stocks, like Archer Daniels Midland stock. Or they might be short any other publicly traded entity, but it’s unusual to see a mutual fund or a hedge fund that is not solely dedicated either to global macro or to commodity trading to really get involved and offset their stock market risk by hedging with commodities. They would hedge with other instruments, whether it’s stock index futures options or the volatility suppression trades that are on right now.

One of the biggest trades – and this is somewhat worrisome in the stock market – is a trade where you buy every dip in the stock market and you sell volatility at the same time. So, every time the VIX (volatility index) spikes up, they sell it. And every time the stock market dips, they buy it. We’ve seen this compression volatility as the market’s gone up, but we’ve not seen any big correction. So, I think that’s really more germane to what’s going on in the stock market, and I think they’re short commodities. Those who do play in that arena, they’re short commodities because they think it’s a continuing bear market in commodities.

Agriculture.com: On the current economy, could you clear up your stated opinion that the added jobs may not be good for America?

Insana: I think the economy, right now, is actually in quite good shape. President Trump’s efforts to restyle it notwithstanding, we’ve seen a pretty good job growth. Though it’s below the rate of 2017, jobs (generally speaking) are fully available. We have 6.1 or so open jobs. That’s a record. What we’re lacking is employees to fill those jobs. In that respect, that’s where I may differ with others. The tax cuts, for instance, were a solution to a problem that doesn’t exist. We’re not short of jobs – we’re short of workers. And I think some of the president’s policies have either 1) driven people away, or 2) discouraged people from coming here to look for work amid fears that they could be sent back. We’re facing a shortage of workers in the agricultural community, welding and other semi-skilled positions, teachers, nurses, and a whole host of other high-skilled positions. I think that’s our bigger problem; we don’t have an adequately sized workforce that is sufficiently trained to fill all the open jobs that exist today.

Agriculture.com: As far as the tax cuts, in your opinion, what socio-economic class will be helped the most?

Insana: Well, I think in the long run, not the middle class. In the short run, the $1,000 bonuses, the bump up in the minimum wage that some companies suggest they’ll make, is welcome. I think when you break down how the tax reductions play out, corporations clearly are getting a full 14-percentage-point reduction in the nominal rate, maybe even more, than the effective rate. So they’re going to do well. How they (corporations) reinvest that money is still an open question. What we’ve seen in the past, typically, is share buybacks, dividend increases, and other sorts of investor perks. We haven’t seen it necessarily get plowed back into productive plant equipment.

Now, some companies have said they’re going to reinvest more in their businesses. Morgan Stanley, United Airlines, Comcast, AT&T, and others have all come out and made pretty bold proclamations about how much more they’re going to spend on capital and equipment. We’ll see if that has a long tail or whether it’s a one-time pop, given the new expensing rules and so on and so forth. Whether it affects the agricultural community, we’ll have to see.

But that part of the economy (the ag sector) has been doing fine, you know, it’s running a surplus. The biggest problem there seems to be the shortage of workers rather than any fundamental problem with the agricultural industry. It’s corporations and wealthy people that at least, for now, seem to be the biggest beneficiaries. Whether the economy grows 3% or more is still an open question. It might be a short-term sugar high, as some people like to describe it.

In 2018, we get a pick-up, but then in 2019, things level off. There could be a variety of reasons for that to happen. My bet right now is that it’s a short-term bump for everyone, but the longer term effects accrue to the wealthy and corporations.

Agriculture.com: What about this raging stock market? What kind of legs does the stock market have? What’s the message to the average investor out there?

Insana: Well, the average investor, who has an extended period of time until those monies are needed in retirement, should stick with your discipline and commit a certain dollar amount every month toward the investments that you like, whether it’s the S&P 500 or a mix of bonds or stocks that you know well and follow closely. And then, just add to those positions and reinvest the dividends over time. Generally speaking, over a 20- or 30-year period, you’re going to do fine, it does appear.

Having said that, we’re a little later in this bull market cycle than I think maybe some people realize. We’re starting to see anecdotal signs of euphoria and greed. In a couple different areas, we’re seeing a pick-up in merger-and-acquisition activity. We’re seeing a bubble in behavior, for instance, in bitcoin.

I think we’re maybe in the seventh-inning stretch here, when it comes to this bull market. I don’t know how long the innings are going to go, moving forward. But there are some signs of froth to me, and if the Fed were to start raising interest rates more aggressively or we had some geopolitical event, I think after a record period in which we’ve not seen a 5% correction over the last 14 months or so, maybe even longer, we’re due for something of a pullback. I suspect we’ll see one maybe before the middle of the year.

Agriculture.com: What about the world economies? Are they exciting, right now, to an investor?

Insana: Oh, yeah. We’ve definitely seen synchronized global economic growth for the first time in a decade, where Europe has come out of its rather moribund situation. Japan is growing more quickly than it has in a while. China certainly appears to be growing. Whether or not that’s sustainable remains to be seen, but it’s growing more quickly than anyone had anticipated.

And so, you do see quite a number of major economies growing simultaneously. You see emerging markets also growing, both their economies and overseas markets last year outperform the U.S. despite the strong gains that we had across the board and U.S. stock market averages.

So yes, the world markets and world economies are generally growing faster than the U.S., and that has been a large part of the reason the U.S. has picked up in terms of economic growth. I think the tax cuts, even though they were anticipated by the markets, might accelerate growth a little bit more. If the world can keep growing, then the U.S. will grow with it. There are plenty of reasons to worry about what would happen overseas. But right now the major economies of the world appear to be in lockstep on the upside and even accelerating a bit. So yeah, that seems to be fairly well measured over the last 12 months or so.

Agriculture.com: As you prepare to speak to ag investors at the Land Investment Expo, what is your message for those investors in the land and commodities categories?

Insana: The economy is in pretty good shape, but it’s going to take some shock, probably, to derail things. Whether it’s faster interest rate increases, some sort of geopolitical event between the U.S. and North Korea, or something between the Saudis and Iran that drives oil prices meaningfully higher than they are now – those are the things that we have to kind of pay attention to.

A falling dollar should actually help the agricultural community. We’ve seen the dollar fall for as long as the stock market has gone up, really, since the election in November 2016. So, at least there’s some wind at the back for commodity exports, even if prices aren’t necessarily rising. It does make those products attractive in overseas markets where there is increasing demand. What I’m really going to lay out is where we are now and what the fundamental risks are in 2018 to a continued economic recovery here and abroad.

Note

Successful Farming magazine is a media sponsor for the Land Investment Expo, presented by Peoples Company on January 26, 2018, in West Des Moines, Iowa. To register, visit LandInvestmentExpo.com.

 

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