Despite all the good things that have happened to those in agriculture, the consensus today is that “good times don’t last;” “we will see $4 corn before we see $8 corn;” “China’s economic bubble will burst, taking commodity markets to the tank;” “the weak euro will inflate the dollar, killing commodity prices;” and, “those paying $10,000 to $20,000 per acre for farmland and $400/acre cash rent will go broke.”
In other words, the general outlook, as currently perceived by many, can be described as bearish. I think the bearish consensus is a good thing. It makes people cautious and less prone to irrational exuberance.
When bearish events occur, they’re never quite as devastating as expected. This sets up contrary opinion on the side of the bulls. Few think that the good times will last.
I don’t read headlines advising buying farmland as the price will continue to soar or to bid up cash rents because grain markets will go higher. What I read is advice to pay down debt and use aggressive risk management.
While I myself believe that in a world as volatile as today that we need to bank profits while profitability exists, I think there is a reasonable chance the doom and gloomers are wrong or at least early. Typically, at a major top, everyone is bullish, more leverage has been employed than is currently the case and nobody believes the good times will ever end.
The consensus at the top should be that no one can see the boom times ending with nothing bearish visible through a telescope into the future.
Despite some doom and gloom forecasts, world population demographics and economic growth centers are decidedly bullish for commodities. Food demand is outreaching production, and we need better weather to catch up. The tens of millions of new global consumers created by economic growth in Asia, India and South America are not going to surrender the improvement in their diets they have just gained.
Food demand will not back up. Food demand growth could slow, but stocks are still tight.
About 20 to 40 cents of every new dollar earned in developing nations is spent on food. This super cycle in ag commodities has been so strong to date that an economic recession rivaling the 1930s did not derail it. Rather than agriculture participating in the bust, as occurred in the 1930s, the ag sector, while not invulnerable to the general economic recession, has endured it remarkably well. In fact, amazingly well.
So far, the economic stress has caused world governments to slow trade liberalization, but they have not embraced protectionism as they did in the 1930s. The U.S. ratified three new trade agreements last year and is negotiating another one with Asia, including Japan. The China bill died in Congress.
Biofuel has become economically viable despite $6 corn and no blender’s credit. That is a pretty remarkable thing considering continued threats to U.S. oil security from Iran and the need for domestic fuel, so we are not held hostage by OPEC.
The U.S. ethanol industry will use 5 billion bushels of corn returning a third of that back as distiller’s grain as livestock feed. U.S. corn producers, continue to keep everyone supplied with corn that needs it, including adding exports to China.
Ethanol now provides 10 percent of U.S. motor fuel production and, ironically, the high price of sugar in Brazil makes U.S. corn-based ethanol industry the low-cost producer. The U.S. is even growing exports of ethanol to Brazil instead of the other way around.
Soybeans at $11 have not produced a new land rush in Brazil. The cost of production has increased so that they need $11 for soybeans there. Farmers who are being told that 2011 will not be repeated and that 2012 holds immense risk are not apt to bet the farm expecting windfall profitability.
2012 new crop corn futures are not paying $6 bushel to farmers and $5 corn is not that sexy considering what costs have done.
Funds have divested their ag portfolios on the basis of the guarded 2012 outlook. That means that if bearish events happen, funds will not be caught long in the market. They have already left the building before it tumbles. The contrary opinion is that someone yelled fire and the funds all rushed through the exits, the building is empty and it was a false alarm.
If so, funds are going to look pretty stupid shivering in the street when the market is still warm inside.
In 1980, when ag asset values exhausted upside potential as producers over-leveraged themselves betting that inflation and good times would never end, it took a real contrarian to buck the bullish psychology and avoid the mania.
There is no mania today . . . there is no “this time is different . . . It ain’t ever coming down” psychology.
The biggest surprise today would be if ag markets stayed good, farmland values consolidated gains, profitability extended and all the bad things that everyone is worried about somehow didn’t materialize.
That would be the surprise. Contrary opinion favors the bulls more than the bears today.
David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.
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