Weather and Economic Convergence

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Predicting the economy is much like predicting the weather. Neither are precise or specific, and frequently they are impacted not by one event, but a convergence of events. While I am not a meteorologist, despite my hours as an undergraduate in this field and taking other natural science electives, I often tell audiences that there are distinct similarities between weather and the economy.

For example, when traveling in the winter, I watch the convergence of cold fronts out of Canada and moisture from the Pacific and the Gulf of Mexico very closely. The right combination means one must bunker in, resulting in canceled events. Similarly, in economics, one must observe the convergence of global economic factors and their impact on the “Islands of Prosperity,” particularly in the Midwest and in other agricultural regions benefiting from high commodity prices.

A case in point is what I call the 8-5-3 Rule of the BRICS – Brazil, Russia, India, China and South Africa. If these nations, which are 20% of the world economy and approximately 50% of the world growth, have an average economic growth rate (GDP) of 8% or more, commodity prices in general will “rock 'n roll.” If these countries converge to a 5% growth rate, approximately 20% will come off commodity prices ranging from corn and beans, to oil, steel and copper. If the BRICS countries converge to a 3% growth rate and remain there for a period of time, this is when we could see $2.50 corn, $4.50 wheat, $7 beans and possibly $40-50/barrel oil prices.

This convergence of events causing economic slowdown in the BRICS nations would create an equity recession on U.S. farm balance sheets as margin compression corrects land and cash rent values over a period of three to five years. Next time we will discuss other elements of the convergence of events.

 

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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