Market history provides insights

According to Iowa farmer and Market to Market Host Mike Pearson, several changes are ahead for the agricultural industry, and using hindsight is critical for planning for the future.

“We have a lot of volatility in the markets, but if we look back through history, I think we can get a fairly decent idea of what the future might look like,” says Pearson.

Looking back

To better predict the future, Pearson notes it is important to analyze the past and present state of agriculture, which is currently in a period of uncertainty, he says.

“Every single sector in the world of agriculture has seen tight margins over the past couple years,” comments Pearson. “It’s an environment driven by nervousness, and this is going to have an effect looking ahead.”

Pearson explains a clear pattern in agricultural market booms and busts is evident when looking at the commodity cycle.

“When we look at the past 117 years, using corn prices as a barometer of the ag economy, we have seen four periods where demand exploded and drove net farm revenues through the roof,” continues Pearson.

World War I

The first boom occurred in 1917, following the end of World War I, says Pearson.

“European agriculture was in shambles,” he says. “The world turned to an untouched ag super power, the U.S.”

According to Pearson, every time a period occurs where prices dramatically increase, structural changes occur to the agricultural industry.

“In 1917, the first spike upwards, we saw the beginning of mechanization in American agriculture,” comments Pearson, noting at the same time, tractors were introduced to the Great Plains. “We did increase production quite substantially.”

In response to the high agricultural prices in the U.S., European production increased substantially.

“From the peak in 1917, four short years later, we were in the depths of one of the worst ag crises in American history, the 1920s, followed up by the Great Depression,” he comments.

Different

A 20-year period of stagnation for American agriculture came to an end at the end of World War II, which echoed the market success seen in 1917.

From 1950 to 1955, more tractors were sold in the U.S. than from 1956 to present day.

“We began mechanization in 1920. We completed it in the mid-1950s. Everybody had a tractor,” he comments.

Unlike what was expected after the market boom, the 1950s and 60s were not crisis years for agriculture.

“There were tighter margins than the immediate post-war era, but we saw stability, and we saw profitability return to the American ag sector for almost 20 solid years,” Pearson notes.

In addition to mechanization, a growing middle class was another key difference in the 1950s and 1960s from the 1920s and 1930s.

“Parents of America’s baby boomers wanted to feed their children better,” he explains. “Parents aggressively fed their children protein, milk and dairy, and all of those things helped support demand, which kept us from going into a massive recession in agriculture.”

Opened trade

The next market spike for American agriculture occurred in 1973 after markets were opened to the Soviet Union.

“All of a sudden, millions of starving communists can eat, thanks to the productivity of the American farmer,” comments Pearson.

Again, the spike in the market resulted in changes to the industry, says Pearson.

“Beginning in the 1970s, we saw farms really begin to expand and consolidate,” he continues. “In this period, we saw farmers who were aggressive and willing to spend a little bit more to acquire their smaller neighbors.”

Productivity began increasing every year as farm machinery began to grow, resulting in lower prices for ag products.

“Finally, Jimmy Carter put the bullet in the head of that rally when he shut off the Soviet Union in 1979,” says Pearson. “We had surplus production and entered the 1980s – a period of crisis again in American agriculture.”

Market changes

The most recent boom period in agriculture began in 2007, peaking in 2012 for grains and 2014 for protein.

“Every single tradable commodity we grow in this country peaked and saw record highs sometime in that seven-year span,” said Pearson.

According to Pearson, several factors attributed to the most recent rally, including growth of the Chinese economy, the creation of ethanol and the 2008 global financial crisis.

As other markets began to fail, hedge fund traders began to turn their eyes to agriculture.

While speculator funds don’t typically hold positions long, the corn industry proved to be an exception, with hedge funds being long on the corn market every month for five years.

“It had never happened before in history. Speculative traders were driving this market,” says Pearson.

He continues, “One of the things we have to grapple with as producers and as lenders is that we’re no longer discovering price in a market determined by the producers and end users. We’re in a market that is and will be highly volatile into the future, thanks to the input of these large speculative funds.”

Looking ahead

Another major change to agriculture was bringing more data into operations as producers purchased equipment with increased profits, particularly with wireless capabilities.

“For those who used new equipment as simply a tax write off and are not using the new technology, they’re going to struggle, and they’re going to struggle for a little while going forward compared to those who embrace it,” says Pearson.

Pearson spoke during the 2017 Agricultural Bankers Conference.

Emilee Gibb is editor of Wyoming Livestock Roundup and can be reached at emilee@wylr.net.