In most summers, many young folk flock to ocean beaches to catch big waves.
I tried that once, ending up having an expensive pair of prescription sunglasses torn off my head and lost in the Los Angeles surf. That was the end of my body-surfing career.
Crop producers couldn’t be floating on calmer seas today, though, despite the pandemic that has been ravaging the general economy and savaging livestock growers. Heck, canola futures have hit $500 per tonne and they could keep rising.
A lot of crop prices have been floating through the pandemic like young guys on inner tubes on a still lake under a sunny sky. Nobody’s worried much about getting swamped by a giant rogue wave.
Perhaps that’s why people in agriculture aren’t rattled by all the talk of a “second wave” of the pandemic that many expect or fear will hit advanced economies when autumn comes. The first wave wasn’t so bad. Why fear a second wave?
Maybe that’s why: nobody in agriculture is much worried about it. When everybody’s disregarding the risk of something, it has a much bigger chance of having an outsized effect.
Perhaps that incredible resiliency of crop prices and movement will get disrupted. Remember what happened in the 2008 meltdown?
Not only did forward prices collapse, but actual movement and new sales of crops around the world just stopped. Thousands of ships dropped their anchors and didn’t move for months.
That was because the financial crisis strangled the flow of money that allows the grain trade to go on. If you can’t get a letter of credit to cover an international grain shipment because your bank just went bankrupt, you’re not going to load and send a ship across the world. Who knows if you’ll ever get paid?
The 2008 meltdown was a financial crisis that became an economic crisis. Today’s crisis isn’t a financial crisis. It’s a medical crisis that has become an economic crisis.
So far, finance has escaped most of the disaster. It’s limping along, not doing great, but still able to function.
Could that change? Huge government intervention has allowed the global finance industry to go on as normal, but could a second wave overturn that normalcy?
That’s the kind of “tail risk” that faces farmers, but because it’s a tail risk (the chance of something going outside expectations by three standard deviations), it’s something most people in agriculture and farming are probably ignoring.
After all, even a shock like COVID-19 left agriculture sitting pretty compared to most other parts of the economy. A second wave would be much less of a shock to expectations (many of us are expecting continuing problems from COVID-19), and therefore much less likely to cause a three-deviation collapse in prices.
It’s that “unless” factor that I think makes a case that farmers shouldn’t too easily accept that crop prices are going to be resilient, come what may. That’s what’s happened but isn’t necessarily what’s going to happen.
Hedging that risk, at least to some degree in some way, is worth considering, especially in a period in which so many people in agriculture are being so blasé about the risk.
It’s when people stop worrying that you should start worrying. Don’t let the tail wag your dog.