This is my last column until the next issue in August, so I'd like to give you something to think about until then: deflation.
People worry that by using such a word we're predicting lower prices in the grain and/or livestock markets, which ultimately may result in lower farmland values. But don't jump to conclusions.
Economics Still Work
One economic theory says that if industries are deregulated and if freedom of trade is allowed, the cost of products affected in those areas will eventually retreat to the lowest-cost producer.
Frankly, we're seeing many examples of this theory in action around the world and I'm concerned about what it may mean for corn and soybean prices in the near future.
For recent examples, consider the following:
Airline price wars. It's now cheaper to fly coast to coast in the U.S. than it was 15 years ago. Many airlines have already filed for bankruptcy and others most certainly will, since one of the few ways they can drive labor costs down is to file bankruptcy to break union contracts.
• Fast-food price wars. Does anyone believe that McDonalds and Burger King can survive with the $1-meal price war? The fast-food industry has been in a classic economic battle of survival now for quite some time — just waiting to see who will go out of business first.
In my March column on Brazil, I made a strong point about why that country's not going to drive us out of the soybean production business and how we are going to stay competitive. But I also tried to show that the price spread between Brazil's lower cost of production and our higher cost is going to have to narrow.
Brazil is going to have to come up some and the U.S. is going to have to go down some. Otherwise, with the current price of soybeans being very profitable in Brazil, production will continue to rapidly expand, driving soybean prices down to world production price levels.
Unfortunately, I see this as inevitable in both soybeans and corn. Cost of production — even though some may disagree — is actually coming down worldwide. Chemical costs are starting to decline. Seed costs will decline fairly soon. The consolidation of farms, resulting in much larger and more efficient operations, is also driving down unit prices.
Here's something else to ponder. The U.S. and state governments are facing huge deficit issues where income will continue to decline and expenses must be cut.
For example, in Minnesota the government has already attacked price supports for the ethanol program. Similar cuts are going to occur in other states. Does anyone believe that the current farm program is going to escape cuts in the future when other federal programs are likely to be hit with major cuts?
Some will argue that the farm bill is law until 2007 and can't be changed. I'm not so sure about that. Laws are like rules — they're made to be changed or circumvented.
I never like being the bearer of bad news. Some of my competitors have been telling farmers that soybeans are going to go to $8/bu. I don't agree.
My concern is that we're close to serious deflation in ag commodity prices. In fact, many people are in denial and will only listen to the bullish forecast. A look at the world may give us some significant clues on what a freely-traded world will do to ag commodity prices.
Richard A. Brock is president of Brock Associates, a farm market advisory firm, and publisher of The Brock Report. For a trial subscription and information on Brock services, call 800-558-3431 or visit www.brockreport.com.