Why can’t agricultural commodities hold on to price gains for long?
After all, the world continues to produce more food-consuming people, even though it isn’t producing more farmland.
Internationally respected market guru Dennis Gartman has an answer.
“In the ag commodities, farmers are just way smarter than anybody thought they were and continue to get better yields out of the same land year after year,” Gartman said.
“So the market’s now worried about limited demand and rising supply emanating from the fact that those farmers are smart – they’re just good at what they do.”
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That’s a fundamental economic conundrum that bedevils farmers’ lives and makes them continually run as fast as they can to improve their productivity just to stay in business.
This conundrum was the subject of a recent Chicago Mercantile Exchange commentary that examined the pressure that rising input costs and industry-wide productivity improvements place on livestock producers.
Many farmers do everything they can to increase their productivity, with many expecting to do better financially because of the gains they make. That often doesn’t happen.
“So higher productivity is always good, right?” said the CME commentary.
“Not if costs are rising and output must be reduced in order to drive prices higher. If demand will not drive prices high enough to cover the higher costs, rising productivity will, to some degree, confound efforts to reduce output and drive prices higher.”
The report includes charts showing the productivity gains livestock producers have made in recent decades, including almost doubling the amount of pork produced per breeding pig since 1982 and increasing beef production by more than a third in the same period.
That increased production per animal means that herd reductions to match demand reductions have to be that much greater.
Yet competitive pressure and high input prices force livestock producers who want to remain in the business to increase their per animal production even more.
“The higher costs provide strong incentives for producers to tighten up their management and increase productivity in order to reduce unit costs,” the report said.
Unfortunately for farmers, productivity gains are a treadmill they can’t escape, especially in times of high inputs and shrinking demand.
“We aren’t arguing that producers should reduce productivity. They should not and they will not,” the report said.
“Rising productivity simply means that the cutbacks necessary to restore profitable prices will have to be larger than expected – especially if they are spread over a longer period of time.”
