The massive market selloff in China is one of those torpedoes that can sink a lot of overconfident assumptions.
It’s something that everyone living and dying in the markets is grappling with now that the world’s main driver of demand growth and increasing commodity consumption stops acting like the automatic saviour for whatever problems we are facing.
Farmers are probably too busy preparing for harvest or actually harvesting to pay it too much mind right now, but over the winter they will have lots of time to think about how their farms futures look without being able to count on ever-increasing Chinese demand to seal the holes they might have suffered in their management, decision-making or expectations.
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In this week’s paper, I’ve started a series of stories looking at how farmers and farm advisers have begun stringing together the disparate elements of farm management to ensure they haven’t left any part of the farm’s hull unprotected, no matter their particular area of expertise and specialization.
While farmers evolve into farming professionals with better skills than past generations were able to achieve, the professionals who serve farmers are trying to integrate their services and work together to avoid gaps that could sink a farm.
Here’s where the concept of the “torpedo stock” comes in, which applies to the underlying theme of my series.
The torpedo stock is an investment in somebody’s portfolio that sinks the overall portfolio. It wipes out the gains from many other stocks, weakening the overall portfolio regardless of gains for most of the components.
One big mistake, one gap, one bit of under-protected hull can allow a torpedo to sink or cripple the ship. For a farm, that can be any element of farm management: the basics of agronomy and machinery management, the more advanced elements of marketing and financial management or long-term strategy such as succession and farm structure. If farmers screw up one crucial element of their multi-faceted farm, the whole operation can go down.
China’s market deflation is scary for many of us who watch the crop and meat commodity markets. It looks like the telltale hint of foam and the slight wake behind a fast-approaching torpedo.
In recent years, China saved the flax market after Triffid disrupted it, provided canola with an ever-growing demand to accommodate Canada’s burgeoning production and bought our ever-increasing pork production. We could always count on China.
When China slumps, our comfy demand assumptions take a hit and leave us reconsidering our outlooks. This is a good example of the risks that could hit any part of a farm, especially those things that a farmer has been most confident or relaxed about or not even considered.
With a darker outlook now, with the boom days probably past, many farmers are probably reconsidering many of their assumptions and taking a close look at their planning.
As China shows us, that’s well worth doing. You never know when a torpedo is going to appear.
