Too Much Corn and Too Much Deflation.
Today’s photo, above, is another from my helper, North Dakota photographer, Rick. This photo demonstrates the poor corn yield from a newly converted marginal land out of CRP into corn acres, in North Dakota, in response to high corn prices and a policy which pays for crop failure, and does not pay a competing price to keep acres in CRP. Rick’s accompanying comment for this photo was “New CRP cornfield: no weed control, no fertilizer, nothing.” (I can’t tell you how sad this story makes me, and you as a taxpayer should be outraged, dear reader.)
If you haven’t noticed, you haven’t been paying attention. All the buzz from our quasi expert economists lately is one word: DEFLATION.
In actuality, this condition has been smouldering for more than six years, or so, but QE-ternity and QE-Krugman have stolen the stage psychologically, even trying to scare us with inflation fears from time to time. Nothing combats deflationary forces like promoting fears of inflation, as there is a large psychological component to deflation, along with the inevitable deleveraging that must take place when an economy has over-leveraged itself. There are just no easy answers when an economy gets to that point, but the ride up sure was fun, wasn’t it? Perhaps your choice is to focus on the potential for collapse and doom, and there are plenty focusing on that, judging by the number of websites and zombie-apocalypse stories which have surfaced these past few years. We might be fine, at this moment, if we had smart, ethical leadership, i.e. a working government and a true democracy right now, but we don’t. Neither do we have a healthy press that can be a watch-dog to the process. Our newspapers continue their demise. And deflation isn’t going away because we also still have big banks that are too big; the goal is still to get everyone to sign their lives away to some type of note, whether it be auto, student, house, land, cell phone, or credit card so we can live beyond our means; and, then, in the end, no one’s saved for their retirement in a new era where we are, on average, expected to live to age 86. And speaking of life-expectancy, our health costs continue to spiral out of control even as we experiment with a new governmental health system that lacks that very thing, the reigning in of costs. What a mess we’ve gotten ourselves into.
Sorry, I’ve digressed badly.
Back to the purpose of this post. What does deflation mean to agriculture?
It’s pretty much agreed that the developing nations’ economic pictures are no longer so rosy, so previously anticipated demand from them may not come to fruition. Besides,they’re getting pretty good at large-scale ag commodity production themselves. We can no longer take for granted export markets in agriculture, and are relying more upon trade agreements. Some of those quasi expert economists which I referred to earlier are in Japan-speak right now, talking decades-out deflation. With an agricultural system that is built upon a mix of supply and demand forces, and policy-driven forces, each of those will be hurt during deflationary time periods. Demand will go down, both domestically and globally. Policy supports will probably back off as well.
Which brings us to the subject of corn.
We already knew we had too much of it and there are rumblings that there’s way more corn out there than the USDA is currently reporting. My family is telling me that there is the biggest daily-growing pile of corn in their small town in Eastern Nebraska, that they’ve ever seen. Corn is piling up everywhere. Farmers are holding on to it in hopes of better future prices even as the EPA has sanely reduced the previously set RFS limits to react to the blend-wall problem, driving its price down further.
Farmland prices are leveling off, as they should be, and there is no doubt that between QE and ethanol policy, the price of farmland is in a bubble.
As other areas of our economy are hit by deflation, agriculture will be, too. Today’s must-read is by Ed Clark, who wrote “Today’s Debt Level Surprisingly Close to 1979,” in which he states, “Featherstone is not predicting a repeat of the 1980s, yet he says the similarities between 1979 and 2012 are striking. ‘If there is a bust, it most likely would be caused by a drop in revenue than higher interest rates.’”
The corn farmer’s revenue is dropping. Per bushel corn prices are under their cost of production. Demand for corn is down.
And in the Midwest, the region which dictates agricultural policy for the whole U.S., it’s all about corn.