By Jerry Gulke
DTN Contributing Analyst
One day of price discovery for the new year is behind us and, for the most part, it focused some hope traders will see the relatively cheap prices ag commodities have compared to the rest of hard or soft assets. A few years ago -- in fact 2008 through 2012 -- I mentioned how cheap that winter vacation home or even a lake-front home in Minnesota or elsewhere was in comparison to how many bushels of anything it took at, say, $6 to $7 corn or $14 soybeans. That was prior to the beginning of the collapse in the latter half of 2012, which coincided with the top in grains created by the second production setback and the planting of nearly every available acre in the U.S. (including CRP) and incentivizing the world to do likewise. If you were a user of grains and were king, you couldn't have designed it better.
The rest is history, as we cycled out of the boom years in commodities and back into the boom years of anything else non-ag, in particular the equities and the recovery of tangible assets in general including housing. A $300,000 winter home in Arizona or Florida took about 50,000 bushels of corn before taxes to buy in 2011-2012. Today, that same home is likely worth 25% more, and would take 150,000 bushels of corn before taxes to acquire.
In 2012, we had the appreciable assets that were turned into disposable cash and other depreciable assets. One might ask himself which he'd rather have today -- an asset purchased at 40% discount 10 years ago that has appreciated, or a new tractor or combine of about the same value but now has depreciated to about half of what once was worth. While we know what a "buy low and sell high" scenario means, we have also been shown that often there can be a "sell high and buy low" mentality that works just as well, especially if one had a 20-30 year plan well ahead of opportunities that have shown themselves to appear during our lifetime. It helps to be born at the right time and to have picked your parents well, but that is a matter of luck, with the rest of the results of our own doing.
Again, the rest is history and we find ourselves once again at the back of the line of prosperity looking forward to perhaps another cycle. The problem is we bought and paid for the technology and genetics that helped us produce, with the help of Mother Nature, abundance just beyond the reach of demand keeping prices "relatively" low. This caught production grain agriculture between a rock and a hard spot. It is hard to know if the need for large machinery came before land expansion or land expansion came first, thus necessitating the need for larger production capacity. It kind of snuck up on us, I think.
We are at a time when, as one producer told me, "You can't win or lose if you don't play the game." In other words, I can't sell $6 corn again if I don't control the land used to produce it. In the meantime, it seems we will wear out machinery and spend heartbeats waiting for that day, and when it comes, it may come at a time we have sold out to the buyers at prices at or below cost of production. A savvy trader asked me years ago why I thought the mega-grain traders don't own much, if any, production agricultural land. It was, he mused, because they can buy the production cheaper than even they themselves can produce it.
While I think producers are much more intelligent and market savvy than they were 30 years ago during the crisis in the 1980s, new times have a way of teaching us that it isn't what we don't know that is a problem. It is what we don't know that we don't know that comes to bite us or is the black swan that ruins the days. I think of my politically liberal but fiscally responsible father, who told me when he was 60 years of age that he was independent, debt-free, and got up and went to bed when he pleased and even President Reagan couldn't get prices low enough to hurt him any longer. A lesson well learned!
Those who were around back then will recall the "trickle-down" idea of the Reagan Administration that helped facilitate the biggest farm recession in my lifetime. The idea may have been correct and later administrations benefited from it, however the short-term effect was not a pretty sight. If you lasted through that era, and are around today, you likely are well prepared. If not, god save the queen as I see similarities today.
I have since changed my trusted old chart to one that shows equities (S & P or NASDAQ) compared to a corn/wheat/soybean index that graphically shows the astonishing disparity that has emerged in 10 short years. All this without inflation and an investment base that supposedly had or still has money in the mattress waiting for an opportunity. For those who watched like deer in the headlights our economy expand in the eight years prior to the Trump presidency and now see it going parabolic as if to say, "We have just begun to catch-up," a word of caution, perhaps. Take a look at how all the "obvious" compares with the depressed ag commodity sector and wonder whose day of reckoning is coming. Things have a way of looking the best near the top or the worst near the bottom. Often it helps to take one of the aforementioned chart overlays and flip it upside down. You'll get a whole new perspective! Perhaps somewhere in the middle there is wisdom?
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If you'd like a copy of my chart, or interested in a one-day seminar exploring the 2018 Ag-Outlook in Chicago on January 23, send me a note at [email protected] or call Jeff or Jamie at 480-285-4745 or contact me at [email protected]. Happy New Year.
(/CZ)
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