State of the ag economy

Recently, a cattle feeder from Kansas asked me to summarize the state of the state of the U.S. economy. In order to answer this question well, we have to examine the numbers. Several indicators can provide a glimpse of the future health and wealth of the U.S. economy.

“Red sky at night, sailors’ delight. Red sky in the morning, sailors take warning.” This old rhyme has served as a weather forecasting indicator for thousands of years. Economically, the Leading Economic Index (LEI) as well as the Purchasing Managers Index (PMI) serve in a similar capacity as the red sky for weather. Both the LEI and PMI are reported monthly and often, forecast the direction the economy three to six months before adverse or favorable times begin.

The LEI is made up of 10 factors, which make up the LEI diffusion index. This metric has been quite favorable in recent times with a positive ascent. However, the diffusion index is down to the 55% level. In other words, approximately half of the elements show positive signs for the economy and half indicate a negative direction.

The PMI exemplifies a slowdown in manufacturing, energy and other basic industries. If this index is above 50, it indicates an expanding economy. An index measure below 50 points to a contracting economy; a measure below 41 shows an economy in recession. Analogous to the sailor’s rhyme, the PMI indicates now is the time to take warning. The latest economic reading is 48.2, which predicts a contracting economy. Two consecutive readings under 50 may be a foreteller of an economic recession nationwide.

Another factor to watch closely is U.S. factory capacity utilization. This metric is applicable for agriculture and rural areas as it shows manufacturing and energy are in a very soft position. Factors that include big carmakers, agricultural manufacturers, and other manufacturing businesses are at 77% capacity. Ideally, this measure should be near 80%. While 77% signals some distress, it is not nearly as devastating as the 2009 level of 68%, the lowest ever recorded.

Interestingly, another global metric to monitor is the price of copper. During the 2007-2012 great commodity cycle, the price of copper was often in the $3 per pound range. This commodity is widely used in everything from irrigation pumps to joint supports advertised by former football star, Brett Favre. Today, copper price is just over $2 per pound. Should the price of copper fall to $1.50, economic sailors should expect rough waters!

In order to successfully navigate the economic reset, one must factor in outside influences. Factors such as the U.S. economy will bear direct impact on future profit potentials for farm businesses. Monitoring key indicators can help you better direct and focus your strategic planning for future sustainability. 

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