It was interesting reading a story in a recent farm publication where experts were cautioning farmers not to over spend in the current good times.
For the grain sector at least it has been a perfect storm of late. Everything that could happen to push prices higher, and keep them there, has converged in the last few years.
We have seen weather pressure in large grain exporting area such as the United States grain belt, a generally stronger commodity sector which when it rallies carries grain with it, a growing wealth in emerging economic powerhouses, particularly China, Korea and India, and a new demand sector with the emergence of biofuels from grains and oilseeds.
The stronger prices have helped the operational bottom line on grain farms look far better the last few years.
And the buoyancy in prices has also pushed farmland demand higher, and that means better prices, so farmers are gaining equity value in the land they already have.
The land price situation occurred in the late 1970s, early 80s as well, a time farmers bought land in the fall and were gaining equity over the winter before ever planting a crop.
Bankers bought the equity gains hook, line and sinker and were eager to lend farmers money based on the increasing values, and farmers went along for the ride.
Then interest rates exploded, surpassing 20 per cent, and farmers were soon gathering at farm gate protests to try and hold off the sheriff and foreclosure actions.
Now there are no real indicators suggesting skyrocketing interest rates, but farmers should always be aware commodity prices are tied to some cosmic yo-yo. They may be high for a time, but they will decline again too.
It is likely the bottom of the decline curve will be higher than in the past, but that does not mean the lows will mean black ink on farms. Remember costs are constantly climbing for machinery, labour, fuel and fertilizer too.
The increased spending power of the Far East is a trend that will continued long term, but not necessarily without bumps on the road. A stagnant U.S. economy with no clear plan of recovery, and teetering economies in Europe will not suffer in isolation. They will be a drag on the world economic situation.
The impact of biofuel production is also likely to decline into the future.
To begin with markets are rather elastic and adapt to new demands rather quickly, so the impact from biofuel demand is already factored into the market reality.
And that demand may actually decline rather than grow. While demand for biofuels may see expansion technology to use everything from ocean plankton to city garbage is likely to turn the sector away from farm grains and oilseeds.
So the experts are right in cautioning farmers to remember the good times today will not last forever, and markets are going to eventually fluctuate lower once more.
