With a big investment in concrete and steel, agriculture and the world economy could blow right through today's recession into global prosperity, according to Bruce Scherr, chairman, Informa Economics, Inc.
The materials are needed for another round of infrastructure building in the world, a move that is necessary to accommodate global economic and population growth, Scherr said at the annual meeting of the National Alliance of Independent Crop Consultants in Memphis.
Infrastructure building is already taking place in many developing countries, said Scherr. “In countries like China, India and Brazil over the last three or four decades, we've seen the migration of 3 billion people from culturally defined subsistence levels into middle income or near middle income wage earner levels. As they migrate to middle income, they require infrastructure, housing, stores, roads and schools.”
The demand placed on agriculture has also been astounding, Scherr said. “From a food standpoint and the challenge for agriculture, as income levels increase, they trigger demand for higher valued food. This creates an extraordinary demand pull that could outpace the ability to supply. But we never got short. In the last eight years, the only commodity that we couldn't get at high prices was wheat, and that was because there were some (production) problems around the world.”
That demand has caused some extraordinary price movement in most commodities. “Corn prices didn't go to $8 because of ethanol,” Scherr said. “Corn went to $8 because of the demand pull from unprecedented growth. Corn went back to $3.70 because of demand reduction in the midst of a global recession.
“The question is will we see demand reconstruction as we move through the remainder of this year. My best bet is yes, we will. I think that will happen in the midst of infrastructure investment around the world. The world is going to start demanding steel and concrete.
“That pull is going to create a commodity expansion over the next several years to meet the need of this newly emerged 1.5 billion people in China and another 1.5 billion in the rest of the world.”
Scherr points out that 200 years ago, the United States was doing the same thing. “America built the most formidable middle income society in the world. And we did it by connecting expanding growth to the creation of a middle class. It's the greatest strength of this country and it's always been the greatest strength of this country. It's all about building a society that consumes.
“It worked during post-Depression during the Roosevelt administration, so why isn't our country moving toward infrastructure as a key investment strategy today? We're into Round 2 of global infrastructure investment. It's been going on in developing countries around the world over the last three or four decades.”
Scherr points out that China “has been using concrete at a rate that would cover five Los Angeleses in one year. It's not just to build schools. It's water systems, dams and housing.”
Scherr blames the United States for not only forsaking infrastructure development, but for being the major contributor to the global recession today. “We became obsessed with economic activity that produced entropy. It's why the world economy is in trouble today. It's all about us. We committed the sin of institutional failure. The sub-prime lending problem created a housing problem and unregulated lending and so did not linking the loan to the ownership of the asset.
“Because of our $15 trillion economy, when we fail institutionally, we take the world with us. We are the reason today for this global setback.”
Scherr believes a turnaround in the world economy is right around the corner. “No. 1, the global economy has come together the way it has despite the activities of politicians around the world. The world economy has globalized because businessmen have globalized.”
Scherr believes the banking problem in the United States is well on its way to being righted as well. “We're about halfway through this recession. I believe we will see it start to turn by the end of the summer or early fall of this year. We'll have a 20-month to 24-month recession.”
The world economy is also set to benefit by various government stimulus packages around the world, “and there is an enormous amount of pent-up liquidity in banks all around the world. It's not been loaned to date because of a lack of confidence. The Fed is working extremely hard with other banks around the world, and I would suggest that over the next few months, we will regenerate a new level of confidence that will allow bank to lend to banks, banks to lend to commercial entities and commercial entities to consumers.
“If infrastructure Round 2 can be as dramatic as our first round back at the beginning of this decade, economic expansion could be significant. That is a big deal. That says to my mind that the prospects of $100 crude oil, $4 to $5 corn, $7 to $10 soybeans are greater than those commodities moving to the lower end of the scale.”
Scherr said the prospect for price “to achieve and sustain a real value is greater today than at any time in agricultural history. Most farmers won't agree because they say it's never been that way before. My point is that there's never been a world like today, with all these billions of people wanting and needing the infrastructure and needing to live a normal life.”