Monday, November 26, 2007

Our double-whammy wealth effect...

An odd thing today - I spoke with my John Deere dealer regarding a deal we had made two weeks ago on a 9570 combine for next year. There is serious doubt whether I can get one.

Really.

Dennis (my dealer) is wondering what his year will be like. The situation may be much the same for 9000 series 4WD tractors. He remembers 1973 and customers putting their names on a list for a new tractor. (I was under the North Atlantic at the time, but my buddies all talk about that year like it was their one date with Miss America)

Wall Street has not missed this happy economic news. Deere stock prices:


I may not get a new $300,000 combine because just like me, a few of you guys have placed some orders too. Personally, I blame the producers in IA who knew they had a huge crop from about June onward. I have made sarcastic references to the sailors being in town, but it turns out economists have a better description of what is igniting farmer spending: the wealth effect.
The effect includes the changes in the amounts and composition of consumer consumption caused by changes in consumer wealth. Economists believe people spend more when one of two things is true: when people actually are richer (by objective measurement, for example, a bonus or a pay raise at work, which would be an income effect), or when people perceive themselves to be "richer" (for example, the assessed value of their home increases, or a stock they own has gone up in price recently). Economists also believe that this situation has macroeconomic implications. A typical response to the wealth effect includes a reduced supply of labor; however, personal income will still be increased. This can be seen by the parallel outward shift in the production function, which is indicative of the wealth effect. The effect's size is governed by a different calculation in either case. [More]
Given this definition we have dual engines for our wealth effect: realized wealth in the form of an extra $20B in net farm income, and perceived wealth as we all revise our capital inventory (land, equipment, etc.) by the current market prices.

Unlike our urban cousins whose home prices soared as their incomes stagnated, we are grumbling about tax problems while land prices skyrocket. This is, in my view, an unprecedented economic tsunami for US agriculture.

At this point, every other farm media article I have read to date launches into a stern Calvinistic sermon about profligacy - all the reasons why the good times can't last and why we don't deserve this windfall are carefully laid out.

My take is different.

Act now. Act boldly. Add market share [acres] (or at least defend what you have).

Tomorrow could be too late. In every bubble (which this well could be) the secret was to bet heavily early, and I think this is still early because we are not sure it's a bubble yet.

The wealth effect is generally lamented by economists and other commentators but that does not seem to make much difference. What is demonstrably true is the downside is much less devastating than we imagine it. Even at the nadir of the farm economy (1987) mortgage defaults were about 7% - or in other words, after the wildest inflationary spiral and harshest monetary response in modern farm history, 93% of borrowers found a way to keep on keepin' on.

Much of this wealth can be realized into cash or other assets right now. I think more than a few marginal operations will take this option, and enjoy the result.

Our wealth effect is real right now. Those who choose to wait and scoff cannot deny this moment.

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9 comments:

rhoads said...

You can probably manage to tough it out one more year John. Take that money you save by not purchasing that new combine and outbid some of your neighbors for more ground. Make no mistake, this is a bubble, but it's still a pretty small bubble that will get much larger before it bursts so you should have ample time to get that nice, shiny combine and grab some more land before the next puke in the markets. Happy days are here again.

don said...

The infationary spiral in land prices in the 70's lasted 10 years before the bubble burst. Could that happen again?

camel cowboy said...

check to make sure that combine isnt going to russia!! there are red ones available since they didnt get the contract--

John Phipps said...

don: I'm not sure any of us can call the length of this boom, but my guess is it will take 3-5 years for expenses (especially rents) to be bid up to lower our gross margins back to the level we had in say 2005. The bubble doesn't have to burst - we will simply adjust until it's a very small sphere.

camel:

May be too late already. When I called my Case dealer to let him know I had decided on the JD machine, he said they expect to run out of production as early as next week themselves.

Sooo, the old 2366 is looking better than ever. To tell the truth what I will miss most is the $100,000 plus accelerated depreciation (179) for my 2008 taxes.

Statements like the above are evidence things are pretty durn good here on the farm.

Anonymous said...

First PC to Mac, then Red combine to Green. What's next????

John Phipps said...

anon:
It does seem like I'm having a mid-life crisis doesn't it? I'm even thinking of switching to a new pew in church.

Whoa - that's just crazy talk...

John Phipps said...

Just so you don't get any ideas about switching wives. The home-made brownie recipe goes with me.

Northern Indiana said...

Well, John, going from a red to green combine will be one of the best decisions you'll ever make. I went from a 2388 to a 9660 and there is totally no comparison.

John Phipps said...

North:

My 2366 has been a great machine, but the 2377 I priced doesn't offer much but more horses. I had already upgraded to the AFX rotor and other small changes.

If Case had offered a 6010 or 5010 it would have helped. The 2377/88 look the last of a line.

What sold me were the cab sieve controls, one-point head hookup, and other technological advances on the 9570 similar to their bigger machines.

The money was essentially the same, and my Case dealer has given me the best service I have ever had.

Case needs to make a new machine for guys under the 7010 category, IMHO.

But, maybe we're extinct and don't know it yet.