Are we heading back to the dreadful/wonderful years of the 1970s?
There’s a good chance we are, think some economists and market analysts, and that would have major implications for farmers.
I wrote a story that’s running on page 4 of this issue about an investment fund operator who thinks there’s a good chance that 1970s-like stagflation will come back after the pandemic is over. He’s promoting Canadian farmland as a good place to put money as a hedge against either inflation or stagflation.
Stagflation, while bad for most parts of the economy, tends to be good for commodities and particularly farmland values. With governments flooding their populations with money to get through the pandemic, and many businesses likely to be weak and failing after the pandemic ends, the economic conditions that created Watergate, streakers, “easy listening” music and disco might give us a fresh version.
“That’s exactly what happened in the 1970s,” Stephen Johnston of Veripath Partners told me about big government spending atop moribund economies.
“If we see stagflation, then farmland will be one of the better performing investments you can be in.”
If you’re from a western Canadian farming family, you know or have heard all about the 1970s. That was a golden era for most farmers, with high crop prices for most of the decade bringing decent profitability and escalating farmland prices creating a lot of wealth.
That was also true for oil producers and most other commodity producers. Those were great days for most farmers, oilfield workers and commodity investors, but generally awful times for developed economies, people living in cities and pop music.
Saskatchewan boomed. Alberta boomed. Money poured into the West.
Much of the rest of the western world’s economy rusted. In the mid-1980s everything flipped, knocking the supports out from under the farm economy and commodities and allowing urban and developed national economies to recover.
But those years of good returns and land price appreciation created a cohort of fortunate farmers, some of whom kept much of their wealth after everything ended in the early 1980s.
Could we be on the verge of that again?
Johnston thinks there is a strong likelihood of an inflationary or stagflationary environment coming.
A number of influential economists think so too. They see inflation if we get either a booming economy or a stumbling, stagnating economy.
After decades of declining inflation and falling interest rates, the post-pandemic recovery is expected to be a likely inflection point. An overall boom is expected by some, while a commodities boom is expected by others.
Still others don’t expect to see either scenario.
They see the low-inflation environment lingering, with ravaged business and corporate sectors, debt-burdened governments, aging populations and ruthless competition from countries like China and India undermining the chances for goods producers to push prices higher.
The lack of an economic boom will negate the chance of a straight inflationary cycle, they think. The aging of the population and competition from the likes of China will restrain demand enough to hold back commodity and product prices enough to avoid stagflation.
My guess is that a weak but positive economic growth cycle is likely post-pandemic, but that won’t be accompanied by structurally higher commodity prices for a few years. Even with the booming growth of the 1980s, commodity prices took years to spark up, allowing that boom lots of room to run. It seems far too early for the structural commodity bear market to end, regardless of this year’s surging prices. I’ve been seeing those as part of a bear market rally rather than the birth of a new long-term commodity bull market.
I’m guessing that this year’s high prices will be the top of a range that should last till near the end of the 2020s, although any major weather problem for a significant global crop could cause much higher prices this year.
It’s too soon to see whose outlook is right. The freaky pandemic economy and markets make that impossible to know right now.
It’s too early to assume that the good times, either of the 2006-14 or 1970s periods, are back, as tempting as that is. Lower-than-today crop prices should be assumed.
But for farmland, it’s hard to see prices cracking. Commodity prices themselves are tightly connected to current and nearby demand. Farmland is connected to long-term demand, which is not nearly as twitchy. Farmland values are a derivative of crop prices, but farmland is like a classic commodity itself: a specialized substance that can’t be easily replicated or quickly manufactured. Its cycles are very long term.
What kind of a future are we going to get? What sort of past period is it going to look most like?
But though it has risen greatly in value, farmland values still look like some of the safer prices in our overheated markets, and that’s true if we get inflationary growth, stagflation or just a stumbling-along economy.
If there’s one asset that looks like a good hedge against most situations, it’s land.