Wednesday, August 26, 2009

The Agricultural Economy and the General Economy are Inversely Related

Thanks to an article written by Stu Ellis, University of Illinois, here is an answer to the puzzle of why the stock market is rallying on perceived economic recovery but the agricultural sector, including commodities and live cattle, is lagging or worse. The following are excerpts from his interview with Kansas State Economist Allen Featherstone:
Featherstone says the farm economy and the general economy do not always move together, since the linkage is an inverse one that has farm income low when the US GDP is higher. He points to the relationship between the US stock market and the Illinois corn price and says the correlation has been nearly neutral since 1960, "Therefore, while the general U.S. economy may be slow there appears to be little long term evidence that there will be major spillovers into the U.S. farm economy. In fact, based on history, it is more likely that the agricultural economy and the general economy are inversely related."

The Kansas State economist says the overall strength of the farm economy is as strong as it has been in nearly 20 years and . . . if farm income remains high, so will land values, but if incomes fall, there is a good chance for declines in land values, and he says USDA forecasts have a lot of uncertainty about future farm income.

Given Featherstone's warning about declining farm income and land prices, does he think farm income will drop? He says US agriculture has been reliant on trade, but the trade surplus agriculture enjoys will decline more than 50% this year due to reduced overseas demand. That will impact different commodities and will impact farmers who produce those commodities, "A reduction in agricultural exports may lead to a building of commodity surpluses (stocks) and a reduction in crop prices and ultimately net farm income." And he says the two prior "busts" in the land market were caused in part by a softer global demand for US farm products.

Featherstone inadvertently provides part of the answer to why the Baltic Dry Index, normally a leading forward indicator to a period of rising economic bliss, has actually lagged markedly behind the current stock market rally. Featherstone indicates there has been a more than 50% decline in overseas demand for our commodities 'this year', and all those commodities would have been transported on various types of ships to many foreign ports. If demand for basic commodities produced in the USA remains 50% and more below normal, that would necessarily have a continuing material impact on freight rates as measured by the Baltic Dry Index.

While Featherstone doesn't address where he sees demand for our commodities in the coming year, the tone of the interview is on the negative side for a rapid global recovery and increased demand for our commodities in the coming months.

Click the blog title link above for the full text of the8/26/09  article by Stu Ellis.