No one expected the 2009-10 PROs to be above last year’s PRO at this time (almost $11 per bushel for high quality wheat), or even as good as the present 08-09 PROs, but the reality of the $7.87 per bushel PRO for 1CWRS 13.5 put a bit of a pall over this world’s GrainWorld conference in Winnipeg.
It’s a common feeling at market outlook conferences like these this winter: why did all the forecasts last winter turn out so wrong? Canadian Wheat Board chair Larry Hill summed up that feeling in his opening remarks, saying “What a difference the last year has made . . . What we as farmers hoped for was a new plateau (of high prices.)” But the many predictions for the latter seem to have disappeared.
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A similar view was expressed by Ernie Sirski at the Manitoba Canola Growers Assocation meeting during Manitoba Ag Days: what’s happened to all the glowy predictions of a “new era” of high crop prices? Weren’t some folks talking about $30 canola?
GrainWorld had a small parade of economists trying to give out their 2009-10 predictions, which must have been a tough assignment for them, as they all pointed out. Warren Jestin, chief economist of the Bank of Nova Scotia, made some gutsy predictions about overall world and Canadian economic performance this year, but wryly noted no one should ask economists “real world questions” because they generally can’t answer them. Last year when I was doing my series looking at the “long term commodity bull market” theory and whether that idea still held water, ScotiaBank was one of the many Canadian economic predicting outfits that completely missed what happened in the incredible rally and subsequent slump. They weren’t as wrong as CIBC and Jeff Rubin, who were bullish, bullish, bullish, but they didn’t get either the overall economy or the commodity bust right. Which raises the question of why we’re looking to them for guidance again . . .
Same with agricultural economists. As Brian Oleson of the University of Manitoba pointed out, it’s pretty unfair to ask economists to predict the future for the economy. After all, we don’t ask political scientists to predict the results of an upcoming election, yet we constantly confront the ag econ folks with demands to tell us what’s going to be happening in the market next winter.
World renowned ag economist Alex McCalla, from the University of California, Davis, offered a fascinating view of commodity price history over the past century, an analysis which pointed out ag commodities’ long term decline in value since the late 19th century. He noted that after spikes, the ag markets tend to settle back down into their long term decline. But he was refreshingly honest and upfront about his own lack of predictive ability: at a conference in June last summer, as most ag commodities were within a few weeks of the ultimate peak of the commodity bubble and its subsequent collapse, he was predicting that ag commodities would stay strong and avoid the downdrag that other parts of the economy were feeling from the brewing U.S. recession.
It’s quite unfair of all of us to impose prediction on economists, people whose science is not of the soothsaying nature. Their discipline allows for rigid analytical dissection of elements of markets but always breaks down when expanded to try to capture what actually moves and drives markets. That’s a human thing, not a numbers game. They’re good at providing the background for various tangible elements of the market, but that can’t just be pushed forward into the future, as we force them to do. Oleson tried to rise out of the restrictions of his discipline by examining the notions of the “Black Swan” and “Perfect Storm” (neither traditional economic concepts) as a way of understanding what happened in 2008 and offered some valuable insight into how these factors put so many predictors in the wrong.
I’ve always found the best wisdom on how markets are likely to behave in the future to come from long term traders and brokers. Because they’re actually putting people’s money on the line with their calls, and living with the consequences a few months out, it’s not an academic pursuit for them but a matter of truly and unscientifically attempting to sense the direction of the market. They take into account what economists and analysts say, but then combine that with their own experience of what’s actually happened in markets before and trust a lot to their gut about how markets tend to react in these circumstances. Markets are intensely emotional, with huge mood swings, and being able to gauge those is the prime skill brokers and traders develop. Recently I’ve been speaking to a number of traders who lived through the ’70s, the 1988 spike, the mid-90s surge, etc., and I find they’ve got a wisdom that comes from years of having to put their clients’ money – and their careers – on the line. Unfortunately trading is a gruelling discipline and there are few traders left from before the 1972-74 surge, but if you can find one, have a chat with him about his life in the markets. If anything can provide a way of looking forward, that’s probably it. And don’t demand so much of the economists.
