David Kohl 2, David Kohl

April 5, 2016

2 Min Read

Recently, a young man from California asked me, “With cheap commodities, who benefits?” Wow! This is a great question. This young man assisted in a rapid-fire “hot seat” type of question session at The Executive Program for Agricultural Producers (TEPAP) in Austin, Texas. Actually, there are several interesting implications from crashing commodity prices worldwide.

U.S. agriculture, particularly in the flyover states and rural economies, continues to experience a backlash because of suppressed commodity prices. Energy companies are scaling back workforces and capital expenditures, while some consolidate. Of course, others filed bankruptcy, which is now in vogue in many states with large amounts of energy production. Commodities in the agriculture and manufacturing sectors are retrenching. With that said, are there beneficiaries from lower commodity prices?

The simple answer is yes. Lower oil and petroleum prices are one benefit to the general economy and to the agricultural sector. Although there tends to be a lag effect, lower oil prices filter into numerous things such as, fertilizers, crop protectants, etc. If you are in the car and truck business, sales of larger, less energy-efficient vehicles like sport utility vehicles (SUV) are strong. The question is, how much longer the market can sustain these tailwinds?

In addition, the service-based economy which accounts for about two-thirds the U.S. economy, definitely benefits from lower energy costs. In fact, money saved often appears as discretionary spending. Concerning food costs, most American households spend only small percentage of their total budget in this category. However, with 43 percent of the global population living on less than $2 a day, lower commodity prices can be extremely beneficial.

On the flip side, if commodity prices remain low for an extended duration, it can result in an economic slowdown and possible deflationary impacts for the general population. The manufacturing and commodity complex generates employment with the multiplier effect. Specifically, every $1 spent in manufacturing and agriculture becomes $3 to $7 in the general economy. This element cannot be discounted for the future. In addition, lower commodity prices must be closely watched for a possible ripple effect through the general economy.

In summary, as is often the case, low commodity prices can help some while hurting others. However, remember that commodity markets are extremely volatile and no economic cycle, up or down, lasts forever.

P.S. With lower commodity prices, why is the general population not experiencing an increased household sentiment for spending? Well, increases in healthcare costs and inflation in other expenses have absorbed benefits of lower commodity prices, including energy. 

About the Author(s)

David Kohl 2

David Kohl

Dave Kohl, Corn & Soybean Digest trends editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups. He can be reached at [email protected].

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