A looming recession and vertigo-inducing commodity prices are worrying grain analyst Jim Bower, with Bower Trading, Lafayette, Ind.
Speaking at the Minneapolis Grain Exchange teleconference on USDA's Feb. 8 World Agricultural Supply and Demand Estimates, Bower said a U.S. recession could ignite a world economic slowdown. “A lot of people think that emerging markets can hold the United States up (during a recession). I'm on the opposite side of that coin. U.S. consumers spend four times more than the entire Chinese economy annually, so if we do get into a recessionary environment, I can see them pulling us down.”
There could be some delay in the recession because the world “will not run without food and energy. But these high prices for fuel and food — global prices of food have increased 40 percent or more in the past year — are starting to weigh on the middle and lower middle classes worldwide.”
Bower isn't rebuking high prices, however, noting “farm and ranch communities need to make some money. But if you escalate prices to outer space levels, we hurt the demand base. Over time the market spikes, overshoots itself, then the pendulum swings the other way and we stay down for several years.
“In 1996, wheat prices spiked, hurt demand, then took wheat down from a record of close to $7.50 a bushel to $2.35 for a year. Then we sat down between $2.35 and $3.50 on wheat prices for about eight years.
“I do not think it is good for the American farmer and rancher to have prices escalating to this level or higher,” Bower said. “This is starting to be a very counterproductive situation long-term. Once you destroy your demand base or start whittling it down and opening up opportunities for global expansion, that hurts on both ends.”
If the U.S. government decides to get involved, one thing that could send grain prices moving lower is the removal of the 54-cent tariff on Brazilian ethanol, Bower said.
A better alternative would be to “open up more acreage or ease down the mandates on the fuel requirement until we have a more adequate supply of grain coming into the pipeline. If we keep escalating these grain prices at this level, if we took corn to $6 to $8 and beans to $15 to $20, it's going to put a severe hardship on our poultry, livestock, aquaculture and baking industries, which is not good. We need that for the population.
“When I look at the supply and demand tables, they are dangerously low. If we have a drought this summer, I can make a case for a negative carryover. The agriculture secretary has to make a decision, or at least tell the public what we're going to do if that happens. It looks like it would meltdown our entire livestock and poultry industries and related end users. That's not what you want to do here in America.
“These are prices that no analyst in the history of the market has ever seen. Fundamental analysis in this type of a market is less important than the makeup of the market and how it's going to eventually siphon itself out. Volatility is the norm now. You're just going to have to expect it, both up and down.”
At the same time, producers need to stay focused on taking advantage of high prices while they can. “The market is more of a hedger's market,” noted Bower, “for those who have product that they either own, and or are going to produce. These prices are fabulous compared to what they've been historically. They can leave floors and leave the topside open. But if you get caught in the speculative market in a really big position with hundreds of contracts, and you're wrong, it can be devastating.”
Eventually, the market will do its job, Bower said. “It will find the price that brings a lot more production globally into the pipeline, and it will start to slow the demand and start the process of alternative protein. It doesn't happen overnight. It's kind of like the dot.com situation, or the real estate in Florida. It will bubble, then some little factor will come in and burst the bubble and that will be it. I think that will be what eventually happens in this market.”
Bower said wheat's inelastic demand means buyers will continue to pay higher and higher prices for it. “Northern Midwest farmers are looking to plant more hard red spring wheat, more soybeans and drop corn acres. I think corn acreage is going to drop now with this escalation in soybean prices. Personally, I see a cut in corn acreage of anywhere between 8 million and 10 million acres, not so much in the key states, but in the fringe states.”
The ongoing rise in the cost of inputs also concerns Bower. “In 1989, we spiked prices way up after two bad crop years. Everybody got comfortable in the winter of 1990, and they started raising cash rent prices like they're doing now and input costs went up. Everybody got a little lethargic and in 1990 we had big crops and it was just a matter of a few weeks and the bottom dropped out on prices. Anybody who didn't have their input costs covered took a real severe hit.
“We're not making any bones about it. We're stressing getting input costs covered while some of these prices are higher.”