Against The Grain.
Via Kevin Muir of “The Macro Tourist” fame
I have had some bad trades in my day. But lately, one call has been especially atrocious. For the past couple of years, I have taken stabs on the long side of the grain market. At different times, I have held various positions for different lengths of time, but make no mistake - grains have done nothing but cost me money. Sure, I might have a decent sounding argument, The Last Remaining Cheap Asset, but the market is indisputably telling me that
Similar to the 1920’s. The US Farmers leveraged up, commodity prices fell during the entire 1920’s. No crop insurance then. Hmmmm crop ins/mortgage ins/govt involvement. Distorting the free mkt. Policy generally has unintended/unforeseen consequences. Perhaps consequences that come about with a blind eye.
My comment comes from a five decade background in advanced food production technologies development. I think the article is only partially correct. It is absolutely accurate regarding the US family owned farm. It is less correct regarding economic outcomes – regarding US farms owned by large corporations and multinationals.
All farmed crops (species) have very critical economies-of-scales affecting their margins and in recent decades economically optimizing those economies-of-scales have enabled large multi-national farming operations to become totally, or at least partially vertically integrated (fertilizer, seed, processing, storage, transportation and energy) producing the absolute minimum product costs – in the most major cost sensitive production cost categories. Smaller scale and non-vertically integrated family farmers simply cannot compete because they are scale and integration limited and can not reduce their production costs compared to larger scaled enterprises. Worse – they are often services and materials parasitized – by some of the same large multinational ag. companies that they compete with in their product market places.
Americans have a love affair with the pastoral perspective of the family farmer. While there may be many attractive and admirable attributes to family farm life – economically, that perspective is economically dysfunctional and a growing myth. Beyond artificial economies – government regulation and family farm subsidies – the current optimized economies-of-scale, vertical integration, economic efficiency and just plain basic math – will continue to allow larger operations to displace the family owned farming business – not just in the US, but in “free” economies around the world.
In 1870 more than 50% of the US work force was involved in food production. Today less than 2% of the population is employed on farms (and as of 2009 – 50% of the farm labor force had no legal documentation). Farming is hard and relatively dangerous work – between 1-2 people die from farm related injuries everyday in the US. (https://en.wikipedia.org/wiki/Agriculture_in_the_United_States#Employment)
Essentially, small family farm life is becoming a genetic memory in the current population. Like most memories – over time – only the good times are remembered. So, it is perhaps ironic that in the US – where its “capitalistic market place” has always been revered as the great omnipotent economic mediator, is now often seen as somehow “evil,” “unfair,” and “mean” – as basic insensitive economic mathematics displace smaller less cost efficient business everywhere – family farmers included. The end result and as observed in the article are lower product prices for the majority. This will continue to until we reach the limitations imposed by finite critical resource depletions – give or take – 30 years or so.
Dugger, thank you for outstamding post, Learned from it.
It is interesting that traders are having the same discussion as that taking place in coffee shops across the farm belt.
Speaking as a wheat producer, I would suggest that the ARC/PLC programs have tipped the scales beyond what might have been expected from crop insurance impacts. In certain production area’s, CSP has also been a factor. Any program providing income beyond that of crop receipts will extend these cycles.
While agreeing with Durwood to a certain extent, I would qualify impacts depending on operational structure. A producer with significant holdings of land and equipment free of debt will survive for an extended period during these cycles. This is regardless of structure. A producer with significant rental acres, or debt of some nature, will be washed out whether a family farm or more industrial.
Taking advantage of technology; I can farm a significant number of acres today beyond that of when I first harvested in my teen’s. I remain sound enough of mind to compete while marketing against others. The one weakness the smaller producer has today is that of input purchasing. Durwood correctly states that I can’t compete against those purchasing in significant volume, or those vertically integrated.
Beyond banks asking for more collateral; land rent, and land value, should decline before the cycle is reversed.
Walter L. Powell
Lewis and Lee Land
Walter, consider that some multinationals own all the sources of their major inputs – directly and indirectly perhaps including their own banks – or other capitalization resources. On a level playing field – the reduction of operating costs through optimal scaling and vertical integration of the most economically sensitive production costs – are almost mathematically impossible to beat. Over enough time – it is impossible.
Though there is an offset. Some of those multinationals also sell products (seed for example) to smaller less economically optimum producers – and that income may be less risky than totally relying on their own production with its uncontrolled variables. Competition doesn’t always have to favor the just the victor.
I suspect that is the balance that small farmers hang in now – they exist as income stabilizers and risk offsets to the larger producers. Essentially, at the discretion of their economic efficiency, if not just their will.
Any evidence of small farmers mortgaging their farms to buy BitCoin? Or, BitCoin millionaires/billionaires cashing out to buy small farms? Probably not.
Interesting that the same essay is up at Zero Hedge. It’s refreshing to come here and read comments that are not authored by damaged minds.
What is the catalyst that tips the scale towards lower land prices? The point in time when all of farmers equity is effectively transferred to the bank?