Now that harvest is moving along, it's time to start thinking about the year ahead. It's easy to get caught up in our own small little world and worry about only what's going on in our county (or parish) and be oblivious to what's going on in the rest of the world. However, we have never in our lives gone through the changes that we are experiencing at this time.
With that said, let's address five trends that are going to be influential in your decision-making over the next few months. Some are more important than others, but all of them have an impact on agriculture.
- People need to eat.
Thank God. Farmers will always be in business as there will always be demand for food products. The only question is at what price will the public buy those products. Soybeans, cotton and rice are all major staples that we cannot live without.
- Input prices are deflating.
Not all, but most of your inputs for planting this coming year's crop will be less than what you paid last year. Fuel prices are down. Fertilizer prices are down. Many of the products that are related to these inputs are also down. Natural gas prices have collapsed.
While we may be concerned that the price of the products you are selling are also down, proportionally everything is down about the same. As long as yields stay steady to higher, profit margins are not going to be much smaller and in some cases will be larger than in the last two years.
The difficulty some producers will have in volatile times such as this is legging in to the profit equation.
This past year, for example, if a producer bought his inputs early at high prices and did not sell his crops at the same time, he legged in the wrong direction and it proved to be very costly.
- The economic recovery will be long and slow.
While you will read articles in newspapers and magazines that the recession is over and recovery is on the way, be careful what you believe. Tops in all markets are quick, sharp and narrow. Bottoms are almost always long and flat.
The Japanese recovery has been under way for over 15 years. Who's to say that it's not going to take at least eight to 10 years for the United States to work out of this mess?
No matter how much money the government pumps into the economy, you cannot buy demand! The unemployment rate in the United States is going to stay excessively high for at least the next three to five years. The question on everyone's mind right now is what industry will lead us out of a recession? It won't be the government!
- Deflation will continue to be the trend.
There are many economists as well as many want-to-be economists in coffee shops that think inflation is just around the corner. I am not in that camp! Inflation is caused by two things — money supply and money velocity. Those who think we are going to have inflation are only looking at one half of the equation — the supply.
In a consumer-driven economy when people are unemployed, velocity (how fast we spend money) drops like a rock.
The other key issue in the economy is that the rule of credit has been changed. Banks are not lending money like they used to — and it's going to stay this way for a long time. No matter how big the pile of money is, if you can't borrow it, it makes no difference.
- Farmland prices will stay steady.
Even though the rest of the world is deflating, debt on farmland is at extremely low levels and thus the downside price risk is still minimal. Asset values cannot drop sharply unless you have forced liquidation sales. That will not happen in this environment. While I believe the upside is limited near term, the downside is just as limited.
Bottom line: Agriculture is still the best occupation to be in. Almost all farmers will still have jobs next year and plenty of food to eat and while many balance sheets will look worse than they did a year ago, they still are going to be high relative to the last 10 years' values. These are still good times for agriculture.