In my road warrior travels interacting with producers and agribusiness leaders, there is much discussion concerning oil prices and other economic variables that seem to provide a surprise around every corner. A question from one producer was, “How is oil connected to up to 80% of farm and ranch expenses and potential revenue?”
An obvious link is fuel oil; however, oil is linked to chemicals used on farms as well as fertilizer. Transportation of products to and from markets is linked to oil. If oil creates inflation or deflation, it has an impact on interest rates, commodity prices, and even the value of currencies both in the U.S. and abroad. It is interesting to note is that oil price has played a role in every recession since 1969 in the U.S.
The $60 per barrel range appears to be an area of stability for new energy sources in the U.S. Prolonged oil prices in the $30 to $40 per barrel range will create issues because new energy development will be suppressed. Nearly $1.5 trillion of investment has been made in alternative energy development, with up to 25% financed by high-risk junk bonds. Could suppressed oil prices result in these bonds having difficulty, creating a bond crisis that could impact the financial system?
Another variable closely watched is copper price. This commodity is used in many products worldwide, and therefore is a closely watched economic indicator. Copper prices have declined from the high $3.00 to low $4.00 range, to the low to mid-$2.00 range. This is a definite sign of global economic slowdown. It is also a signal of possible deflationary conditions in economies in Europe and emerging nations. U.S. agricultural and rural areas are tied closely to the economic health of these regions of the world.
Over the next six months, keep an eye on oil and copper prices, two variables used to assess the health of the U.S. economy, but also economies around the globe. They are linked to the North American agricultural economy because it is quite dependent on agricultural exports.
Is the use of technology in many sectors creating deflationary conditions? The oilfield is a classic example of how innovation and technology is reducing the cost of extracting new forms of energy, oil, gas, and other natural resources.