Frequently, I have the opportunity to conduct programs with Eric Snodgrass, a meteorologist from University of Illinois at Urbana-Champaign. Sometimes our travels together allow time to discuss economics and meteorology, and recently we compared economic cycles to the four seasons of the year. Of course, we were not the first to make this comparison as Nikolai Kondratiev, a Russian economist under Joseph Stalin, developed this concept years ago as part of behavioral economics. Unfortunately, Joseph Stalin did not like the findings and had Kondratiev imprisoned and eventually killed at only 46 years of age. Thankfully no longer under the scrutiny of Stalin, Kondratiev’s theory of the seasons remains pertinent. Let’s examine how the seasons are playing out in today’s economic cycle.
The summer season was 2006 to 2012, or the great commodity supercycle. The economic stars aligned to bring record profits, appreciated balance sheets, and land value increases to those in agriculture. Of course, summer was spurred by several factors: demand from emerging nations with a record rise of the middle class; ethanol mandates in the U.S. and Brazil; low interest rates; and the low value of the U.S. Dollar that gave American producers a competitive advantage. Of course, record profits led to increased use of technology and innovation which spurred better production. Not surprisingly, this summer season of agriculture has only been replicated three other times since 1910, but the other supercycles were much shorter and more abrupt. And while even inefficient producers were making money, eventually, “high profits cured high profits,” as the saying goes.
As in the cycle of a year, summer turned into fall; and from 2013 to 2017, everything cooled down. Grinding along, this economic downturn continues to elongate. First, profits dropped for the inefficient producers that overpaid for marginal assets. And those that did not build working capital reserves were forced to seek refinancing for liquidity. Others burned through their working capital as a backup to cash flow and profit losses. In the fall season of the cycle, capital expenditures were postponed; and some asset values like equipment, livestock and marginal land declined. And eventually, fall inevitably transitions into winter.
Producers have shared with me that they generated more profits during the six years of the summer season than they did in the prior three decades. They also report that the fall season has been emotionally draining as well as economically challenging. What will winter bring? Stay tuned…