For the last couple of years, U.S. farmers have been insulated from the global financial crisis. How much longer can this separation continue, and are we on the verge of sharing in some of these economic “issues?” Let’s take a quick look at some of the long-term trends and who the important players are in the world. The pie diagram below clearly shows that the economic “stool” has three legs: The U.S., China and the European Union. The U.S. accounts for 22% of the world’s GDP, and China is at 11.6%. The European Union accounts for 23%. It is important to recognize that since these three regions combined generate 57% of the world’s GDP, if weakness occurs in any of those “legs,” the stool is not going to stay up.
While we read almost daily in the U.S. about the concerns of our debt, the debt of many other countries has already caught up with them. No one can continue forever to borrow its way out of debt. That’s what is being attempted now. Just consider these numbers:
1. Japan’s debt is 212% of its GDP.
2. Greece’s debt is 165% of its GDP.
3. The U.S. is at 103%.
4. China is at 26%.
Now consider the unemployment rates in these countries.
1. Greece is at 25.1%.
2. Spain is at 24.6%.
3. The U.S. is at 7.8%.
4. Germany is at 5.5%.
The numbers clearly point out the significant problems facing many countries in Europe. Germany is the backbone of the European economy, but one country in itself cannot support all the nations of Europe.
Long-term commodity trends
While U.S. farmers have enjoyed substantial bull markets in the grains as a result of poor production in other key markets over the last couple of years, many other commodities have not participated in this move. In looking at some of the outside commodities just consider:
- At the peak, crude oil prices were $145/barrel in 2008. The price today is approximately $90.
- In fall 2011, gold was $1,900 an ounce. Today it is closer to $1,700.
- Sugar prices have dropped from $25 to $19 since March.
- Coffee prices in the last year have dropped from $2.80 to $1.60.
- Cocoa prices in the last year have dropped from $320 to $230.
There are many of your neighbors who are convinced corn and soybean prices cannot go down. I will agree that corn and soybean prices are at a higher plateau, but see the lower end of that plateau being lower than what most people think can happen.
We cannot forget that commodity prices are cyclical; that is never going to change. Low prices are followed by high prices, and high prices are followed by low prices. As we look at what’s happened in other global commodity prices, is it impractical to think that as demand for grains is hurt by high prices, and high prices encourage more production, that within a year corn prices could begin with a four and soybean prices could be near $10?
I believe price declines of this magnitude will happen. It’s not a question of if these price declines will happen, it is a question ofwhen they will happen. All it will take is one good production year, and supplies will move from tight to extremely burdensome. Areas of the world that have never raised corn are raising corn. In areas of Brazil where corn had previously been a cover crop, it is now becoming the primary crop. China’s demand for soybeans will remain strong, but the world cannot count on one customer supporting the entire market! What happens as China’s economy continues to soften?
Use risk management
I’m not certain I’ve ever seen a time in my 37 years in this business that risk management was more important, yet fewer farmers are employing risk management now than was the case 10 years ago. There is tremendous downside risk from $7 corn and $14 soybeans. Remember where these markets were just five years ago? Most people don’t want to. History almost always repeats itself, and this time will be no different.