America's society and its economic outlook changed with the terrorist attacks that hit New York City, Washington, D.C. and Pennsylvania on Sept. 11. It will take many years to fully comprehend the total impact. I don't want to seem callous, but as business conditions change, farmers may need to change their business plans to adjust to the new economic realities.
Here are three initial short-term projections:
First, the terrorist attacks created a civil and emotional crisis — but not a financial crisis. The U.S. economy was already slowing and the slow-down in travel, convention and restaurant trade all helped tip the scales that put the U.S. into a recession. The rapid cut in interest rates and large expansion in the U.S. money supply will probably result in a short recession — with the bottom likely in the first or second quarter of 2002.
Second, the global and U.S. grain and oilseed supply/demand situations did not change significantly. Commodity funds and others holding large long positions in the grain and energy markets liquidated them and eventually went to the short side, putting short-term pressure on grain and energy prices. Commercial users were active buyers on the recent price break.
Third, stock and bond prices will be volatile in this uncertain environment. A low in the equity markets is due early next year. The synchronized global recession is likely to reduce U.S. ag exports into early next year with meat exports being hit the hardest. Short-term interest rates are likely to continue lower as the Fed pulls out the stops to avoid a prolonged recession.
Here are four long-term projections:
The “just-in-time” inventory management system is likely to change. As many manufacturers found out, the theory does not work well if it “just-is-not-there.” We look for U.S. food processors and international grain buyers to begin building inventory to insure that they can keep processing — just in case.
Ag commodities are likely to outperform the equity markets. Food is essential; other discretionary spending is not. Auto, home, computer and electronic purchases are likely to stall well into 2002.
Farm subsidy payments are likely to drop significantly in the next Farm Bill. A lot more money has already been spent by the Department of Defense and for the airline industry bail out. Ultimately, higher grain prices will also reduce future government LDP payments.
The global economic slow-down has been deflationary with energy, grain and meat prices falling sharply lower. The Fed's policy of lowering interest rates and aggressively increasing the money supply will plant the seeds of the next round of inflation. That will eventually lead to lower bond prices and higher farmland mortgage costs. Get your long-term mortgage rates locked in by the end of this year.
What does this all mean for you?
The economic uncertainty caused by the terrorist attacks and the looming military conflict has pressured prices. That trend is likely to continue into the first quarter of next year.
Ultimately, the decline in global ending stocks, the huge amount of food aid that has been promised to the nations that are cooperating with the U.S., and the lifting of sanctions against many Middle East countries all suggest a rebound in grain prices later in 2002.
In the months ahead, stay cautious. Use government loan programs to generate cash flow and plan on lower government subsidies in 2002. The stage is set for higher, more volatile market prices in the last half of 2002.
Alan Kluis is president of NorthStar Commodity Investment Co. If you have marketing questions or want more information, write: NorthStar, 1000 Piper Jaffray Plaza, 444 Cedar Ave., St. Paul, MN 55101; call: 800-345-7692 or e-mail: [email protected].