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.
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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