The great commodity super cycle has burned out. It lasted for a decade, two and one-half times longer than any previous super cycle boom time over the past century. The easy money has been made in the grain industry; however, top-flight managers can still earn a profit when they focus on production and operations, marketing, risk management, and, of course, carefully monitoring finances.
A question I often get from grain producers is, “What will be the duration of this downturn of the economic cycle?” Also, there is interest in knowing the strategic factors that will impact profits and sustainability. From the supply side of the equation, favorable weather increased supply in major production belts worldwide, both in the southern and northern hemispheres. Technology, innovation, and higher levels of management by major producers have also contributed to the supply side of the equation.
Strategically, the slowdown of the economies in emerging nations, i.e. the BRICS and KIMTs including Brazil, Russia, India, China, and South Africa, along with South Korea, Indonesia, Mexico, and Turkey, has reduced demand. Geopolitical and military risk and its impact on trade and trade negotiations have been other elements influencing demand. Central banks around the world adding stimulus and devaluing their currency against the U.S. currency have resulted in a strong dollar, inhibiting export potential.
Another strategic factor has been agriculture production infrastructure competitiveness in the markets. In the U.S. and Canada, energy has had a higher priority than agriculture in moving products to market in some cases. Of course, reduction in oil prices and softening of the biofuel mandates are variables to consider. The economic health of the rebounding livestock industry in the U.S. and abroad is another dimension to take into consideration.
Given these factors, there are several scenarios that could play out affecting the duration of the economic downturn in grain. If one or two of the strategic factors mentioned are economically negative to the grain industry, a one- to two-year moderation could be expected with weather being the most important factor. If two to four of these factors negatively impact the grain industry, prices reminiscent to the 2002 to 2007 economic scenario would be a distinct possibility.
If this downturn lasts five years or more, then a more severe adjustment, possibly a scenario similar to the 1980’s crisis, could occur causing major adjustments in balance sheets and cash rents. This would result in the adjustment of overhead and fixed cost structure of the industry thru land rental and lease arrangements. Next time we will discuss how to be sustainable in this type of cycle.