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DAVID KRUSE

Economic corrections - history rhymes

December 28, 2018
By David Kruse - Columnist , Farm News

Ag input suppliers are worried about the sour mood that many farmers have regarding the outlook. That makes them more reluctant to open their pocket books and spend. Commodity market outlook meetings can be a rather dismal exercise that can cause some long faces. I like to add some humor to it as a saving grace which is why I have a couple good slides in my outlook presentation that give rise to a few chuckles. It may be a slog but we will get through this.

Economic corrections are done by either time or price. The Ag boom of the 1970s was corrected by the ag depression of the 1980s with price. Some markets lost 85 percent of their value. This correction is likely to be more in terms of time. It will last a while wearing some out. I have included the hypothetical 29-year corn cycle researched by Perdue University in my outlook for years now. It shows a multiyear basing period of a decade or so followed by a launch in prices and a spike in prices to new highs that may last a half dozen years followed by a decline that they call a landing and then a new basing period of a decade or so before the up-cycle starts over again.

The new base price equilibrium will be higher than the preceding one. The previous basing period was $2 corn followed by the launch to $7 corn followed by a decline to $3 corn after which another basing period is likely capped near $4 creating a $3-4 trading range for a few years yet. Dr. Elwynn Taylor says that the next 89-year drought cycle kicks in about 2021 with the following years timed to have weather similar to the dust bowl, which is when the next launch would be likely to commence. Corrections of either price or time are intended to weed out weaker farm operations which follows the life cycle.

They say that high prices cure high prices and that low prices cure low prices and I believe that both are true. There are high cost producers that had expanded during the launch and spike of the last cycle that could pay the bills in fringe production areas with $5-7 corn, that are frankly not economically viable producers today with $3 corn. They have to go out of business. I think that we are starting to see that happen. Crop insurance will not save them. Trump's trade war disrupted this cycle and will distort production decisions made by farmers globally. U.S. farmers may reduce planted acreages while global farmers expand if the tariffs and trade wars protract.

U.S. livestock producers are expanding cattle, hog and broiler production helped by cheap corn. They are not as profitable as they should be however because of tariffs from the trade wars. The broiler industry has hit a wall where chicken production has caught up to demand and profitability has collapsed for that industry. The cow herd expansion has stopped for this cattle cycle while the offspring of the expanded cow herd will still add more mouths to feed in 2019 adding to corn demand. Same for the hog industry which is expected to continue to build barns into 2019 in order to supply the new slaughter capacity from new plants. The launch of the last corn cycle was primarily due to the birth of the ethanol industry adding a third leg to the stool of corn demand along with feed and export demand. It was a very beneficial thing for corn demand that is now in danger of being damaged by Trump EPA RFS policy.

Given low corn prices ethanol production should be profitable and it is not. We should be seeing growing ethanol demand from E-15 and we will not as the year-around E-15 demand will not offset the reduced demand from RIN waivers. The RFS has been effectively diluted. That is why USDA reduced the ethanol crush in the December supply/demand report and may have to further reduce it. Ethanol and DDG exports are caught in the trade war.

Carryovers are burdensome, so much so that we need something material to impact production somewhere in the world to reduce them. That typically doesn't happen in an El Nino year which is forecast. More acres and good yields in both North and South America would keep the lid on the corn market and continue the basing process of this cycle.

The bottom line is that farmers may have to slog along for a few more years while low prices build the demand base globally. An economic depression accompanied the dust bowl and there is risk that the economic boom that extended post WWII that created billions of new consumers that improved their diets will pause in a protectionist repeat of the Smoot-Hawley era of the 1930's.

I will again report that history rhymes

They did not have a farm bill nor did they have crop insurance in the 1930's so those risk management tools have evolved as well. There will be marketing opportunities in seasonal rallies as funds trade net positions and move markets doing so.

It will not pay to be either too bearish or too bullish in the near term as the base for the next launch of the corn price cycle is built. I still believe that if the neighboring farm is for sale and you have the means to buy it that it will be a good long-term investment. Build your base for the next launch.

David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.

 
 

 

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