The Point Of Normal Return
September 9, 2011 Since the giddy days of 2006-07 – when crop prices were high, input use was robust and everyone in the agricultural industry from grower-customers to ag retailers was making plenty of money – and the subsequent market crash of 2008-09, the number one question I get asked at industry events and meetings is “when will ag get back to normal?”
The short answer is “I don’t know.”
And I’m apparently not alone in asking this question. Last week, I attended the annual Mid America CropLife Association meeting in Bloomington, MN. At that event, the first speaker on the agenda was Dr. Michael Swanson, an ag economist for Wells Fargo, who attempted to answer the new normal question for the assembled attendees. On the plus side, said Swanson, times have never been better for those who make a living from agricultural. Aided by high commodity prices and demand for ethanol, revenues in ag have tripled in the past three to four years.
“People are very enthused in ag right now,” he said. At the moment, Swanson added, agriculture profitability is benefitting from world market demand for U.S.-grown crops and government policies that favor the ag industry. But on the downside, the days of $8 corn and $14 soybean fueling endless market growth won’t continue indefinitely.
“Price is going to be a huge risk for all of us in agriculture,” warned Swanson. “Nothing this good is going to last forever. And the downside when it happens will kill a lot of ag operators because they aren’t prepared to deal with it.”
In the next few years, he said, there will likely come a point where global demand, government ag policies or both change. This could initiate a prolonged market downturn that lasts two to three years.
“Now I’m not predicting this will happen,” said Swanson. “But ag operators need to assign a reasonable amount of weight that it might occur or they won’t get through this unscathed.”
So regarding the quest for a return to normal, ag operators need to stop waiting for it to happen. In this new normal, they will need to pay close attention to the trends impacting the marketplace and adjust their business plans accordingly, to prosper in the good times and survive in the bad.
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