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The Farming Sector: History Repeats Itself

Russ Winter

Yesterday morning, fund manager Michael Price spoke on Bloomberg about global demand for agriculture and, without skipping a beat, he mentions that his fund is involved with a scheme to hoard (I mean “warehouse”) two million pounds of coffee.  That went right over Tom Keene’s head, and the conversation shifted to speculating (I mean buying farmland).

Glencore is a huge player in the commodities markets and is undertaking a large IPO today. I should mention right here that Goldman Sachs is calling commodities a sale. This is useful to know as it provides them cover for big league robber baron gaming of these markets.  There are revelations that this firm has effectively cornered the zinc market and is estimated to hold 50-80 percent of inventory. Once again, inventories are ballooning to levels far beyond what the real economy needs or supports. This is reminiscent of the 19th century robber baron age. The only difference is in that era the government wouldn’t bankrupt itself cleaning up the mess left by crooks and kleptocrats. Typically, in the manipulation bust of the robber baron era, most of the damage was confined to the players/speculators involved. This is as it should be.

london lead inventory

There has been a great deal speculation in farm land and big advanced purchases of fertilizer and equipment to exploit high prices. There are indications that this crowded trade may be about to learn one of life’s lessons. Historically, farming is risky and crops can and do fail.  It is one of the oldest stories in world history. It means farm incomes will fall, perhaps severely.  The USDA just released its weekly planting progress report. Corn planting progress weighed in at only 4 percent  compared with a 5-year historical average of 40 percent.   Top corn producing states, Illinois, Indiana, Kentucky, North Dakota and Ohio, all reported no progress in corn planting over the past week due to the record amounts of precipitation.

Spring wheat planting is still well behind the 5-year historical average of 43 percent with only 10 percent of the 2011 crop planted.  The winter wheat crop condition continues to worsen as more of the crop slipped grade this past week. Of the 2011 crop, only 34 percent is in excellent or good condition, compared with 68 percent one year ago. In 2010, 7 percent of the winter wheat crop was in poor or very poor condition, while 41 percent is in such condition at this time in 2011.  If this persists, we will be left with the worst of everything: very high grain prices, inflation and a wiped-out farm sector.
The CEO of Smithfield Farms, the largest pork producer in the US described the disruptive effects of serious inflation on farmers. Mr. Pope also worries about the impact on farmers, who are leveraging up operations to afford the ever-rising price of land and fertilizer that has resulted from the increased corn demand. “There are record prices for livestock but farmers are exiting the business!” he exclaims. “Why? Farmers know they won’t make money.

farmland value gains

Source: Kansas City Fed

Another Boom-Bust?

farm income spending

This post is reprinted from Russ’s premium service, Russ Winter’s Actionable. Click here to access Russ Winter’s Actionable


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