Do you like the feeling of a sugar high? Does it cheer you up by lifting you out of feeling down?
Or does it make you a little giddy and likely to make bad decisions?
David Kohl wonders what is going to happen when the world gets over its present financial sugar high. And he fears it will be bad for crop prices. Kohl is an ex-Virginia Tech economist and a widely respected economic guru on farm economic and financial affairs. He’s up in Canada right now doing a prairie tour sponsored by the Royal Bank of Canada. I caught his talk at the Manitoba Special Crops Symposium this morning and I talked to him about it afterwards.
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He’s got a funny message for a guy whose tab is being picked up by a bank: don’t overdo the debt right now, because interest rates could spike and commodity prices could fall. That includes the price of farmland, which may see a sudden stop to its steady rise of recent years.
But wait, you say. Haven’t the equity markets recovered 60 percent of the amount they lost in the crash and hasn’t “recovery” been declared by government and mutual fund salesmen everywhere? Well, that 60 percent gain is down a few points now and the rest of the economy and financial world could go the same way when the world’s stimulus money from massive government spending wears off. This multi-trillion dollar stimulus spending is what Kohl is referring to when he talks about the world being in a state of a “sugar high,” and he thinks all asset prices have been pushed up by all the money slopping around the planet looking for a return.
Kohl expects a lot more weakness ahead, and that could cap the commodity bull market that began early in the decade just ending. That raises a couple of points for him: “If you haven’t made money in the past six years, Houston – you’ve got a problem.” In other words, if you weren’t able to eke a profit out of this historical bull market in grain prices, you might want to consider getting out. Prices are more likely to get weaker from here, not stronger.
And for those who earned good profits and expanded in these fat years he has a warning too: “The failure to manage growth is the most common danger” to farmers. In other words, with lots of extra money on hand, farmers often expand their acreage, their machinery base, the complexity of their operations, but do nothing to expand their ability to manage the operation. This often leads to disaster and all those gains trickle awa.
With commodity price volatility likely to last, and prices not likely to go ever higher from 2008’s peaks, farmers need to play a bit of defence. What does that mean: “Cash, cash, cash, cash, cash.” In other words, don’t plough all your money into more land and bigger machinery on the assumption that prices will always be profitable. Keep a bunch of cash to the side in case a bad year comes along.
“Have you built your financial fortress?” he asked. Well, have you?
