The other day my Road Warrior travels took me to the Upper Midwest to speak to a corn and soybean group. One of the long-time participants at seminars I conduct asked if there are any similarities between the economic bubble a decade ago, and the very favorable times the grain sector in the Upper Midwest is experiencing currently. You will notice that the term “bubble” was avoided in discussing the agricultural picture. This sounds like “déjà vu all over again,” a phrase coined by one of my favorite New York Yankees, Yogi Berra.
First, let's examine the bubble of a decade ago in the general economy and the housing sector. The perfect conditions converged to create the bubble. First, the technology sector’s growth resulted in paper gains in the stock market. This perceived equity increase created the wealth effect, i.e., people spend more when they feel richer. When the markets crashed, baby boomers invested in real estate and housing – particularly in the Sun Belt and retirement areas of the country. This bubble was spurred on by generous housing legislation encouraging homeownership, very liberal credit terms by the shadow banking system, low interest rates by the influx of foreign money and the Federal Reserve’s actions and, of course, “hot money” attempting to earn a quick return.
Now, let's turn our attention to the current favorable times in agriculture. The grain sector, no doubt, is reaping the benefits of global economic growth in emerging nations as economic power is shifting toward those areas of the world. Next, the ethanol industry is a game changer, along with a cheaper dollar that has resulted in a more favorable export climate. Low interest rates and Mother Nature’s ability to influence supply has created a bullish environment.
The more these game changers remain positive and the economic cycle continues to be bullish, the more the psychological mood will become increasingly speculative, particularly in land and commodity markets. This will attract the fringe investors and stretch more traditional producers/investors to take on additional risk. On a conservative positive note, ag lenders for the most part have not liberalized lending standards, and much of the investment is profit and cash driven.
The bottom line is that there are a few similarities between the two economic cycles that bear watching. An early warning first alarm would be changes in legislation, particularly relating to ethanol, degradation of global economic health in emerging nations reducing demand and of course the bear of land values, which is increased interest rates. At the producer level, declining margins and profitability will be the second alarm that asset values are not sustainable. As Yogi says, “It's not over until it's over,” a powerful thought to consider in cyclical economics.
Editor’s note: Dave Kohl, Corn & Soybean Digest trends editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups. He can be reached at [email protected]