Right now I’m enjoying some holiday time with my wife and three little girls in Fargo, and boy is this bringing back some memories of the 1970s! In a good way. Most obviously this is because we are staying in a North Dakota hotel with a big, fun swimming pool, and back in the late 70s my Dad would drive us down from Regina to Minot and we’d stay in the big Ramada hotel overlooking the valley and we’d spend a few days splashing around the tropical-themed pool and playing primitive video games which seemed so ultra-modern then.
But underlying these hotel similarities is that same feeling that the prairies floated upon in the mid-late 70s and seems to be floating upon now. In those days I was a pre-teen and early teen junior news junkie, and I watched endless programs on the economic malaise gripping the world and the whole era of the late 70s seemed one of woe, weakness, breakdown, futility. Jimmy Carter, Ayatollah Khomeinei, high oil prices, problems in the middle east, the western world rusting out. Except on the prairies, where everything seemed great. Money was all over the place, everyone had jobs and there was a happy, positive feeling from Regina to Minot and all around. In the city of Regina, where I grew up, everyone had an uncle who was a “rich farmer” who’d show up and hand out presents, or take them to Disneyland.
A true disjuncture of our region from the rest of the Western world, then as now.
Here in Fargo there are “Help wanted” signs all over the place, shopping mall parking lots are full and there are no empty storefronts, yet when I go to Starbucks in the morning to get a coffee I am handed a flyer and encouraged to buy an armband for a company initiative to create microloans for small businesses to help American end its joblessness nightmare. The USA Today that gets shoved under the hotel room door is filled with stories of economic woe. And CNN is chock-a-block with footage of the Occupy Wall Street protests. It’s a completely different world outside the prairies.
Now of course I’m going to relate this all back to the Long Term Commodity Bull Market, which is what caused the prairie happiness in the 70s and now, and is the source of the economic malaise, stagnation and suffering outside the resource-producing West. We’re in the middle of one of those cycles of high commodity prices and struggling national economices, and fortunately within the agricultural sphere we’re on the good side of that dynamic.
So where does it go from here? How long does this cycle last and what does that mean for farmers? I’m on holiday, but I’m thinking about those questions, and so I thought I’d jot down my thoughts before my kids wake up and want to get back to Shipwreck Bay pool.
Here’s my best guess at when the commodity bull market will end: 2018-19. That guess is based on the history of other commodity bull markets, and they last 15-20 years, and this present iteration began some time in 1998 to 2002, depending how you look at it. Jim Rogers, the commodities investing guru, pegged the beginning at 1998 and began investing his money in commodities then, and since he’s been bang-on right and was years before others piled on the bandwagon, he’s worth listening to. A few years ago he told me 2019 was a good guess at when this one will end, based on its likelihood of being extended since the last one was a long time ago and the slump in commodity prices from 1982 to 2000 was extreme. So that seems as good a target as any.
What makes a commodity bull market end? It tends to be the combination of demand destruction, new sources of commodities being developed and alternatives being discovered. We can seem some early signs of that now: high prices are pushing people to use less and be more efficient; new sources of oil are being found, production methods in backward areas like Russia and Africa are being radically improved; there is much innovation in shale gas, oilsands oil, recycled metal and heavy investment in agricultural production;
But for the cycle to turn back over the booming economic growth for decades will take a few more years, as commodity replacements get bigger and commodities put less pressure on the rest of the economy, methinks.
What does that mean for crop and meat prices? When will they get their last big kick at the can in this era of multiple kicks? We can be hopeful there. The ags were the last commodities to join the commodities market rally and if we’re lucky that means they’ll be able to carry on for longer than other commodities in energy, metals, etc. and be able to remain generally high until the end of the overall commodities rally. That’d certainly help pay off all the expensive equipment and highly-priced land farmers are busily buying up these days. The ag commodity prices had better stay up until 2019 for all this new debt to be paid down . . .
When will the equity markets bottom and the next long term equity bull market begin? I haven’t believed any of the “recovery” talk since 2008, since I don’t think we’re anywhere near liquidating all the debt our society piled up through the 1990s and 2000s, and that’s a necessary precondition to any real organic recovery taking hold. As long as consumers are crippled by high personal debt and companies are scared of investing in future production we won’t have a booming consumer economy. I wouldn’t expect most of the debt to blow out until 2014-16, which should be when things bottom-out, if the gurus I follow are any guide. In This Time is Different, Carmen Reinhart and Kenneth Rogoff’s study of 700 years of financial crises, the authors note that financial crises tend to take about seven years to work out, and good economic growth doesn’t happen until that happens. Do the math and see what year that takes you to.
I also note Robert Prechter, the Elliott Wave International prophet of doom, has pegged 2014-16 as the likely bottom of the equity markets – after another sharp and brutalizing downturn which he expects to hit any time now – and since he’s been generally right about the timing and size of the financial collapse and economic woes since 2007, he’s worth listening to as well.
As you can probably tell from the folks I mention above, I have a generally Hayekian outlook on economics, so that determines my outlook, but I have yet to conclude that it doesn’t work, so I’m sticking with it and hope it keeps being right.
What does this all mean for farmers? Well, if my general outlook is right and there are six or eight years left of a commodity bull market and generally high crop and meat prices, then farmers have 1) a few more years to rake in good profits if they get good crop or livestock production; 2) continuing extreme volatility in ag prices. The 1970s were filled with hugh spikes and sickening drops, so why now now? That’s what we’ve had since 2006; 3) the likelihood of high land prices staying high and getting higher (they are a product of the profitability of crop production on the land) until the boom ends, then they’ll stagnate or drop for a couple of decades. (I get that from David Kohl); 4) queues for expensive tractors and combines, something that’s already driving farmers crazy; 5) high fuel, fertilizer and chemical costs to eat away some of the crop and livestock based profits; 6) generally low interest rates until the financial crisis wears off, which will make the debt easier to carry. (At some point our Western societies might decide to rid themselves of the crippling debt burden by running the printing presses to pay it all off, and that will likely cause high interest rates as inflation gets out of control, but we aren’t anywhere near that yet, as far as anyone can tell);
I know I’m not going to be right with all these guesses. I’m sure I’m wrong on some. I might be off on most. Hopefully I’m not dead wrong on everything. But since I’m on holiday and thinking longer term thoughts, I thought I’d lay them out here. Since I can’t stand journalists who pretend they don’t have any personal analytical views, I’m not scared of revealing mine. And since I also don’t mind being wrong, I’m not too worried about being off-side on some of this and having to do years of mea culpas about where I got everything wrong.
And since my seven-month-old baby just awoke, I’ve got to run for a bottle and get ready for another day at Shipwreck Bay!