Inflation or deflation: big questions loom for agriculture

After this, inflation?Deflation?

Stagflation? Stagdeflation?

Or just a return to a weak version of “normal?”

Once we get through these next few weeks of cautious “re-opening” of the general economy, the next long-term trend of the world economy is going to have a huge impact on the value of crops, livestock and farmers everywhere.

There is nothing but questions before us about where economic “growth” goes from here, but the impacts on commodities aren’t as challenging to predict.

If we get growth but higher inflation, commodities including agricultural goods tend to increase in value because people put their money in physical stuff and not depreciating cash.

If we get deflation, the values of commodities fall because people hold on to their cash, waiting for prices to drop further.

Stagflation is a 1970s-like situation, which has weak growth combined with inflation. That situation turned out well for most farmers.

Stagdeflation, with little or no growth and falling prices and demand, doesn’t have an obvious recent example, but the 1930s contained most of its elements. It’s bad for commodities. The 1930s contained an actual depression, and that’s very bad for commodity values.

Most of us would settle for a return to normal if we were given a chance between that and gambling on those various inflation/deflation alternatives. We can manage normal.

It’s possible we will return to normal or at least semi-normal conditions. Many are saying that “everything will be different” after the coronavirus crisis is over, but they know no more than anybody else about the shape of the future.

Most of us feed our biases into our forecasts, so the “different” we foresee is often what we want to see. Returning to a typical recession/post-recession normal isn’t necessarily impossible.

For good analytical discussions of these economic and market issues, there are some great podcasts out there. I always enjoy Bloomberg’s Odd Lots, which has an episode this week with Nouriel Roubini (you may recall the economist as Dr. Doom from the 2008 meltdown) discussing the various forms of inflation I describe above. Other economic and financial media like The Economist offer great, free podcasts.

Big investment banks have some good ones. There are lots of places to hear these issues discussed. They have a big impact on agricultural markets.

This shutdown has been more severe than any ever seen in the world economy, and this re-opening is also unprecedented.

Let’s hope the re-opening works, that the infection rate remains manageable, businesses survive, most people can return to work and in time, with COVID-19 beaten back, we can get back to growing the world economy. Perhaps we really do bounce back and get over this more quickly than anybody expects.

But even Warren Buffet, the famed investor known as the Oracle of Omaha, admits it’s hard to say where we’re heading.

“I don’t know,” he said about numerous issues at Berkshire Hathaway’s annual meeting, May 2.

None of us do.

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