Road Warrior

Economic Storm Clouds on the Horizon

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Like a major storm brewing on the horizon, the convergence of events in the U.S. and globally bear watching like a summertime cold front. Economic news out of Europe is like an incessant nightmare with plots and turns around every corner. It appears that officially 12 of 17 nations in the euro zone are in recession. The next big question surrounding southern Europe and Greece is whether they and others will be asked to or voluntarily leave the euro. If that occurs, will this lead to the demise of the European common currency?

This situation is directly related to the slowdown of the BRICS emerging nations, particularly China and India, which are major European trading partners. The latest news out of China is that the purchasing manager index (PMI) dropped considerably, which is a predictor of contraction of the economy.

This economic storm in Europe has strengthened the U.S. dollar as well as caused a flight of investment capital to the U.S., resulting in the 10-year bond rate dropping to its lowest level ever recorded, below 150 basis points.

The jobs report and the latest PMI out of the U.S. also suggest a slowdown in the United States economy. With this convergence of events, commodity prices are taking a tumble with considerable volatility. Only time will tell whether this is a passing storm or the beginning of the end of the nine-year super cycle that has blessed much of agriculture with strong profit margins and appreciated land values.

Those producers with high fixed cost structures who have locked in long-term commitments will need to closely monitor economic margin conditions and make adjustments where appropriate if this situation continues.

 

Editor’s note: Dave Kohl, Corn & Soybean Digest trends editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups. He can be reached at sullylab@vt.edu.

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Dave Kohl is an ag economist specializing in business management and ag finance. He can be reached at sullylab@vt.edu.

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