The Fragile Economy

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  • Midwest surviving economic downturn well
  • Crop agriculture riding six-year super-cycle
  • Livestock industry vulnerable to cost escalation

 

The other day my road travels took me to Fargo, ND, to address an agricultural credit conference. Fargo is one of my favorite places. As a child growing up on a dairy farm in Upstate New York, I followed the New York Yankees’ Roger Maris of Fargo. He was my favorite player because both of us were left-handed batters. Of course, he broke Babe Ruth's record with 61 home runs in 1961, which was during the time I was playing little league and American league baseball.

 

In addressing the conference, one of the bankers in attendance commented that the current state of the economy is very fragile with mixed signals. I definitely agree with that assessment.

 

Concerning the U.S. economy, the Midwest and Upper Midwest are doing quite well. Contrast that to the Coastal and Southern regions, which are struggling and are one trigger event from going back into recession.

 

The agricultural economy is quite similar. Crop agriculture is riding on a six-year super cycle. The devaluation of the dollar and strong commodity demand from emerging countries are creating bullish conditions. These factors, combined with the demand for corn for ethanol and overall low interest rates, are resulting in the best of times.

 

In contrast, the livestock industry is becoming very vulnerable to cost escalation, while receiving static prices for their products. This could potentially place this industry back into receiving negative margins very quickly, further eroding both the liquidity and equity on these producers’ balance sheets.

 

The potential economic cloud on the horizon is that many major economic countries are devaluing currency to grow exports. This, in turn, could potentially result in currency wars, trade sanctions and trade barriers. Each of these factors alone or a combination of the three could potentially be devastating to any particular agricultural industry or the industry as a whole. Yes, the U.S. and world economies are truly fragile.

 

 

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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