The Economics Of Disconnect

The Economics Of Disconnect

Part 2 Of A 2 Part Series

 RICHARD E. HICKS

 OCEAN SPRINGS, MISSISSIPPI

Since the 1970's we have seen several turbulent times in our commodity markets. I will not comment on the early 1970's as this era was before my time. I was, however, in the game in the late 1970's into the early 1980's. It was a time to see, the volatility was spectacular for that time. Prices were advancing and it seemed we were never going to stop. The dollar was under pressure and land prices skyrocketed. By the end of 1980 grain prices finally collapsed. and the Reagan era had begun. At this time, we saw the FED take a very active stance against inflation and by August 1982 it seemed as the Federal Reserve had tightened too much. In my opinion, they nearly shoved us off the cliff. The "speculatormania" as I named it back then was clearly washed out on the economy. An intense drought 1983 forced ag priced higher but, unfortunately, they did not last. The ag depression of the mid 80's was a difficult time for producers.

 

The ebb and flow of prices continued through the 80's and 90's generally driven by extreme weather conditions. The end of the 90's had ag prices on the defensive again motivated by overproduction and lessening demand. The early 2000's witnessed an increase in the speculative interest in the oils and gold. These markets experienced increasing volatility and prices. Our grain markets languished through this time frame without much fanfare. The fall of 2006 changed all that with, I believe, a drought in Australia. This changed the outlook in the grains and prices started to advance. When the Australian drought hit it changed the calculus in the grain markets. They too, were beginning to feel the effect of speculatormania. This insanity would continue to grow in intensity until the summer of 2008 when the "economic crisis" began. Unfortunately, the governments decision to print money and increase the debt laid the foundation for todays' problems. Yes, this is an oversimplification but it all goes into the mix. In the past 15 years the government have taken the Keynesian philosophy to new levels. Contrary to popular belief, you cannot spend yourself rich. Capitalism is a cyclical economic model "boom and Bust" when times are tough some people have to suffer. We must let the economy work. Politicians, however, will not let that happen.

 

What is the disconnect? Simply stated it is the value of our ag products vs the cost of everything else in the economy. One example, we have used for months now is simple, go sell a bushel of corn and try to buy the big jar of peanut butter. Good luck with that. Nearly everything we purchase daily in our lives has risen sharply over the past few years. Inflation has been a way of life for a long time with brief times of deflation. This give and take effects different items at different times, but with always the same end higher prices. Many items, especially, one that have higher labor costs can lead the way, but eventually all prices will seek higher levels. This gets to the crux of our argument. How can we continue to produce products with decreasing prices and increasing input prices? Cash rent, fertilizer, fuel, fungicides etc. do not appear to be suffering from the steady grind lower that we see in the grains. Quite to the contrary, they seem to be doing quite well. As we have seen in past examples, our markets seem to be the followers and not the leaders. The outside markets oftentimes follow the general short term news of the day. As an editorial comment, it seems to be mainly bad. These news items fuel the spec mania and add value past levels we would normally see in quiet times. This overshooting the runway adds fuel to the fire and overshadows reality of the day. We usually go beyond the levels the economics would dictate and it takes some time to readjust.

 I believe we are moving on the third major disconnect I have seen in the past five decades. The late 70's early 2000's and now. In each of these past times. Market dynamics moved consumer goods and raw inputs higher. The sensitive markets felt the pressure first and lead the way. In the past, our grains markets have been the weak complex. Seemingly, ignoring the other outside influences. until a spark sets them off. Past history we have seen weather as the spark. This is impossible to predict. I believe the major motivator this time will be a series of factors, a huge federal deficit, with no end in sight.

 

Generally, rising economic pressure from the overburdened economy an increasingly unstable geopolitical environment and perhaps a weather event tossed in for good measure. Whatever, it is the disconnect between the general economy and the grain markets is extremely out balanced and we feel the adjustment is heading our way. As always, we feel the "experts" are shading the numbers. This is no matter, as our markets are a price discovery mechanism and they will fill the void. Timing is up in the air, the readjustment could begin at anytime or not at all. We may find the magic bullet defeat inflation, cut spending, pay off the Federal debt. All at the same time, we end the regional conflicts with a handshake and a smile. Which scenario is the easier to believe.  ∆

 Richard Hicks is the Managing Director of the R.E. Hicks Group LLC an NFA registered Independent IB.

I can be reached at 618-301-2244, 618-363-0252 sat phone 1-254-219- 7336

Note: Past performance is not indicative of future results


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