Well, if the Sunday Telegraph newspaper (which was my father’s favourite, by the way) is right, and global commodity colossus Glencore is the so-far unnamed suitor for Viterra, it’s just one more manifestation of life in a long term commodity bull market.
That’s a subject I’ve written about since the early 2000s, and it’s amazing to live through a long cycle like this. Farmers live it directly, every year, but probably often have trouble stepping back and getting some perspective on the epochal change that has occurred for them since the early 2000s.
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Remember way back when, when farmers couldn’t seem to do anything but lose money? When farming seemed like an expensive addiction for tens of thousands of struggling producers? Those days are so far behind us they seem to be relics of another age. Sure, if you get flooded out, droughted out, or have some guys with trucks steal you canola from your bins, you can have a terrible, loss-making year. But if you get an average crop, you’ve likely been making lots of money. If you got an average crop every year since 2007, it’s been the greatest of all times in prairie farming.
But, being part of a long term commodity bull market, all commodities have surged, and that has hit farmers as much as anyone else. Diesel has shot far higher than in the slumpy 1982 to 2000 period. Fertilizer – a farmer’s biggest expense – has often gone through the roof, eating away some of the profits, and a disaster if the crop fails. Since farmers have been making lots of money, most want bigger, better equipment, so that’s shot high, partly because of expensive things like steel, but also because the manufacturers can’t keep up with demand, so they can charge what they want.
And land prices have steadily risen to dizzying heights across the prairies, with not just farmers getting into bidding wars to buy up land around them, but also outside investors wanting to get their hands on the most finite ag commodity in the world: productive farmland.
So lots of farmers have made lots of money, ploughed it back into machinery and land, and are now primed to produce massive crops that they hope to sell at high prices for a few years in order to pay it all off.
That seems to me to be what’s going on with the Viterra takeover, if I had to guess, knowing actually nothing at all about what’s going on with this thing. With the Canadian grain sector now de-regulated and the CWB chucked into the dustbin of history, the huge prairie export crop comes open to be synchronized with the rest of the world market. Smart global players, who are active in multiple markets and have great market intelligence, should be able to suck farmers’ crops out of Western Canada and get them to the most profitable markets. So it makes sense for someone like Glencore, or Cargill, or ADM, or Louis Dreyfus to buy-up comparatively small Viterra.
How will it work out for any taker-over that succeeds? If they don’t pay too much, and get a few years of steady business, it could work out very well.
It all depends on the length of the commodity bull market. And that’s something none of us know. I embraced Jim Rogers’ view of the situation way back in, I think, 2003 and haven’t found any real problem with his argument. He says commodity booms tend to last 16-20 years. If the last one started in 1998 or 2000 (not for crops, of course, which perked up in 2006) that gives us between a couple more years to eight more years.
Eight more years of booming commodity prices would give farmers, and buyers of things like Viterra, lots of time to make money and pay off expensive investments. Two more years would be a bit less comfortable . . .
