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DAVID KRUSE

By Staff | Mar 8, 2013

The ag super-cycle is still bullish. The world will continue to be challenged to provide adequate calories to a growing population by boosting productivity, while lowering per unit cost of production.

The long-term trend of food prices has been lower against the backdrop of rising global population.

If there is a period of overproduction it will not be for very long. Global economic growth may slow, but the growth in consumption resulting from global peasants becoming bonafide new consumers with incomes will continue to support the global ag sector.

Climate change, resistance to biotech development and adoption and human intervention disrupting trade will undermine productivity which will in turn support ag prices at levels higher than they would otherwise need to be.

The organic zealots and GMO-phobic are curtailing productivity producing for the rich at the expense of the poor. Those who have made the transition to become consumers improve diets with the first new disposable income they earn.

They will not go back to peasantry without taking governments with them.

China has embarked on an irreversible policy to feed its people and has the economic resources to sustain this policy. It will progressively expand its food imports to many more commodities than soybeans. Farmers have been receiving the financial incentive from markets to boost production relative to demand, but have been undermined by weather from succeeding.

They will continue the effort until the weather relents. It will take back-to-back production success in both North and South America to restore global carryover stocks. There will be demand that will quickly resonate whenever prices fall.

The U.S. ethanol industry has curtailed production confounding those who falsely argued that the renewable fuels standard did not contain the flexibility to respond to the market. It has responded by a much greater degree than hog producers have.

One would think that there was an inflexible pork production standard forcing hog producers to sustain production when market signals clearly told them to shrink production.

The hog industry has stubbornly ignored production losses that the ethanol industry responded to.

There was obviously flexibility built into the RFS through use of renewable identification numbers that allowed ethanol production to slow during this period of tight feed stocks. The RFS continues to grow to 15 billion gallons of corn-based ethanol by 2015.

If corn prices fall as precipitously as USDA forecasts, which assume trend-line yields will be achieved, it will be the ethanol industry that most quickly responds to the market with resuscitated demand.

The U.S. would also recover some exports as the world buyers consumed global stocks in order to avoid the expensive U.S. market.

U.S. farmers have been enjoying an unprecedented period of prosperity, but intermediate cycles would suggest that the economics could change very quickly to eliminate the profit incentive that has been driving investment, negatively impacting farm sector spending.

My advice is to strengthen short-term balance sheets in order to weather short-term adversities and be in position to take advantage of opportunities that will arise.

It is unlikely that farm income will be sustained at current levels, so if income shrinks, spending has to likewise do so. I am as bullish as ever on the macro-ag sector, but cycles and trends have corrections and when the U.S. drought breaks there will be a period of adjustment and fallout result.

Farmers have not been cognozant enough over the prospects of a poor farm bill being enacted, assuming that one is possible in the era of Congressional dysfunction.

Crop insurance coverage has lulled farmers into complacency that it will provide an adequate safety net. The ag sector needs a farm bill with a substantive safety net written into it.

Crop insurance price guarantees fall with the market to where their ability to provide income support can evaporate.

First of all, the crop insurance system needs to be protected but it will not be enough. Sitting at the top of a farm sector boom with no farm bill, relying on extensions of existing law puts farm income on a slippery ledge.

At the moment, economists are forecasting current trends to continue for both the general U.S. economy and ag sector that I am not convinced are sustainable.

We can all hope for the best, but plan for the worst. I would plan on the U.S. economy slowing more than forecast and net farm income falling short of USDA extrapolation.

I think the bond market is still safer than the stock market until inflation becomes the only option left to devalue the U.S. debt.

At that point the funds divesting themselves from commodities today will want back in.

So, the ag super-cycle is still bullish.

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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