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DAVID KRUSE

By Staff | Oct 18, 2013

Today there are seminars advertising the end of the commodity super-cycle, farm magazines are full of stories about the tough times coming for farmers, and university ag economists are putting out the word for farmers to drastically pull in their horns.

This time when the farm economy turns down it will not be a surprise. No doubt that net farm income is going to decline from record levels and that will reverberate back through the rural economy.

It is not all net negative. Livestock producers are likely to continue to do well. So are any end users of cheaper grains.

Farmers are not leveraged even close to the degree that they were in 1980s when the house of cards collapsed upon itself. The Fed is not poised to send interest rates to 18 percent to squash inflation, as was done in the 1980s.

In fact, they are currently still trying to push inflation to higher targets.

Farm lenders are not likely to see the Federal Deposit Insurance Corporation at their doors as happened in 1980. If incomes fall as expected, farmers will hunker down and reduce spending.

Costs will adjust. Farm cash rents lag the trend in net farm income. They did not go up as fast as net farm income rose and now they will follow net farm income lower as a laggard too.

This will tighten producer margins as the top of the income expansion is seen and the trend of income contracts.

No doubt that the recent farm boom was not sustainable, but since the industry is not overleveraged the deflation will not prove as devastating.

There is a difference between being uncomfortable and in agony. This time it may get uncomfortable and as leverage is concentrated, there may be some fallout, but the base demand growth for food around the world as incomes improve will serve as a safety net.

The commodity super-cycle is tied to the world economic metamorphosis of peasants earning incomes to become consumers. That is still going to support the world ag economy and support farm incomes. The first thing that a new consumer does with his wealth is improve his diet and caloric consumption.

Agriculture will still be challenged to meet that demand. Lower commodity prices will help feed demand growth which will start the next cycle.

China is a huge driver of food consumption, and the impact of its slowing growth rate is spreading through emerging economies throughout the world, many of which provide China its base commodity supplies.

The IMF revised its estimate for global growth for 2014 .2 percent lower to 3.6 percent, compared to 2.9 percent this year. That is still an optimistic forecast.

The pickup in the economy expected next year is being undermined by events in Washington. Widely divergent outcomes are possible on how these events unfold.

The public revulsion to the Washington partisan gridlock may evolve into a desperate attempt by politicians to climb out of the depths of the sewer to better present themselves to the public before the next election.

They could go over the cliff with their fingers grasped to each other’s throats and take the economy down with them or relent and use this near-death experience as motivation to act rationally and produce something achievable that would improve their perception to the public.

For sure the farm economy is not going to hold the general economy up, so the farm economy is vulnerable to the outcome. Bankers need farm bills and crop insurance to give them the lending confidence to support farm loans.

It doesn’t even have to be the best farm bill as perception of support rules if there is a safety net set somewhere.

Congress has been failing in that regard, too. Without an ag safety net, and with slowing economic growth perceptions around the world, the caution will continue and that feeds upon itself in a vicious circle.

The ag economy is in a manageable slow-down, but not invulnerable to a recession.

Much of the reason that I don’t expect the commodity-super cycle to end in my lifetime is that by 2025 75 percent of the Chinese population should be middle class.

China’s economy is producing the greatest creation of growth in human history, yet per-capita expenditures on food are still relatively low. Chinese consumers’ meat, milk and egg consumption is expected to grow by 50 percent.

Let’s put some context to that percentage. China loses 400 million pigs each year to pre-weaning mortality and other losses which is three times the size of the U.S. pig herd.

What they want from Smithfield Foods, for example, is the production technology to dramatically improve pigs saved per sow.

They have an enormous gap in relative sow productivity to the U.S. they intend to close.

This week the price of corn in the U.S. was 20 percent below the price of corn in China when Chinese purchases were announced.

Their entire food system is plagued with food security, safety and quality issues that by linking their food supply chain to the U.S. will begin to transfer the working knowledge to improving their own.

The potential market for feedstuffs to China still holds enormous growth potential. When diets improve, consumers don’t go back to being peasants again driving the commodity super-cycle forward.

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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