A key theory I was taught in Ag Economics 101 was that of supply and demand. The basic premise is that as supplies increase, prices decline and demand begins to improve. As demand improves, prices increase. Prices eventually will have to increase to allocate scarce supplies.
Through the 1970s and into the early '90s the soybean market was a textbook example. Soybean prices rallied to over $10 three times in the 1970-89 period and to over $8 nine times. This price action, along with poorly conceived U.S. embargoes, gave a huge incentive for farmers to expand bean acreage in South America.
In the last 20 years we've been in fundamental situations that are more negative than the current situation, yet prices aren't as low. What's changed? Why have prices gone so low, andwhat will ever make them come back?
The answer is not in conventional economics. The economic fact never explained in college is that the cost and availability of money has more to do with price than supply or demand.
Review the M-3 money supply chart (see printed article). Think back and review what has happened to commodity prices and the U.S. farm economy over the last 30 years. During the 1960s and late '70s, commodity prices and land values soared. The U.S. was financing the Vietnam war and the war on poverty by printing more money.
Money supply as measured by M-3 expanded by 13.3% from 1971 to '73. But in 1980, the party was over as major changes were made in the nation's economic policies. From 1980 to '86, a concerted effort was made to slow inflation and strengthen the dollar. Interest rates were increased; commodity prices, land values and the inflation rate dropped sharply.
That tight money policy stayed in place through '92. Now the U.S. government is again increasing the nation's money supply with a high percentage of money going into the stock market.
We're now in a fast-changing global economy and some of the global economic problems are hitting U.S. soybean farmers in their pocketbooks.
One key change in the world economy in the last two years has been the collapse in currency values in many Pacific Rim nations. Many countries that have been hit hard buy a huge amount of U.S. farm products.
This drop in currency value has had a deflationary impact and has acted like a huge drop in money supply in those nations.
There are no easy solutions to the current profit crunch, but we certainly can change some of the key policies that have made the agricultural recession worse.
First, increase global liquidity and institute a monetary policy that creates growth and allows for economic expansion throughout the world. The G-7 economic ministers and our own Federal Reserve Board are so concerned with inflation that they've created a deflationary spiral that continues to pressure commodity prices lower.
Second, have USDA aggressively use the Export Enhancement Program to get U.S. soybeans, soybean meal and oil, wheat, corn, cattle and hogs exported.
Third, provide loans, grants or whatever it takes to help foreign nations that are our good customers and allies turn the economic corner.