2018: Welcome to Ag Normal
Supply & Demand
On a recent hunting trip, a friend asked, “Damian, how did commodity prices move down so much from their highs of a few years ago? It’s not like people on Earth stopped eating?”
Oh, the elation. Not only was I shooting birds with my buddy on a beautiful day, I now could utilize that Agricultural Economics degree!
The answer, of course, is yes, people are still eating. Even poor countries are eating better than they ever have thanks to Agriculture.
Why this consumption doesn’t equate to $7 corn and $15 soybeans anymore is quite simple: supply caught up to demand. As it ALWAYS has.
We in Ag are amazing at food production but it’s no longer just a North American story. Ukraine, Russia, India, Argentina, Australia, and South Africa, all ramped up food production. Millions of new acres came into cultivation in places like Brazil and several countries ending in “stan.”
In short, the globe does a better job of making food for it’s inhabitants than it did just a few decades ago. Good for humanity. Bad for prices.
Which brings me to the first of my thoughts for Agriculture in 2018
Don’t stress. We’ll still export farm goods to foreign markets. Especially meat. For example, there are 5 large pork processing facilities under construction right now in the United States. We’re shipping almost one third of our piggies to foreign markets. As global incomes rise, so does protein consumption - and we’re good at making quality meat.
However, trade isn’t a silver bullet to low prices because the rest of the world learned how to grow food too. Frankly, some arrangements should be reworked. Last I looked, the U.S. sold only $170 billion of goods to China but bought $480 billion of their stuff.
The good news: farm income was up 3% last year. The bad news: The Federal Reserve Banks of Chicago and Kansas City note a “deterioration in ag credit conditions.”
I came of age in the ’80’s. The ninth child of a former herdsman who worked nights as a railroad clerk while mom and us kids tended the dairy farm. This isn’t a “I walked up hill both ways to school in a blizzard” moment, merely perspective. The Ag economy rolls into it’s fifth year of stagnation and, comparatively, things are still OK. In slow times, even break even keeps the balance sheet in tact!
The Iowa State University farmland value survey shows farm ground is down about 20% from it’s high. In my neighborhood of Indiana, it’s roughly the same. That’s bad if you bought at the peak in 2013 but for anyone who bought land in 2000, you’ve quadrupled your investment. There will not be massive defaults due to over-leveraged real estate this year.
We’re either a world leader in Agricultural innovation or a country that values regulation over economic advancement. A rollback in burdensome compliance will allow North American Ag to thrive. In a world that’s learned to produce commodities, our opportunity is in creating value-added food products. An increasingly affluent global customer base demanding quality and variety is good for us. But only if we’re allowed to expand and produce.
Welcome to Ag Normal
Super cycles like we experienced from 2005-13 are the exception, not the norm. Normal means you can’t afford to get over extended and expect rising assets to bail you out. Normal favors money management versus ego. Normal rewards entrepreneurial thinking rather than commodity mindset. Get used to normal - it’s going to be here a while.
Damian Mason is a farm owner, speaker, and writer. He delivers insights with entertainment for the people of agriculture at meetings throughout North America and on his podcast, “The Business of Agriculture.” www.damianmason.com