Pessimistic (or realistic, depending on your point of view) economists are sputtering the r-word in almost every sentence lately. I think they are right. But I thought they were right last year, too. And the year before that...
But the jeremiads are getting terser.
This recession will be deeper than the shallow contraction earlier in this decade. The dot-com-led downturn was set off by a collapse in business capital spending, which at its peak in 2000 accounted for only 13 percent of the country’s gross domestic product. The current recession is all about the coming capitulation of the American consumer — whose spending now accounts for a record 72 percent of G.D.P.And while those of us on farms are not unconcerned with the rest of the economy (what if the kids lose their jobs and move back in?), let's face it - we're more fascinated with our income tax problem. This ag-disconnect is part of the "uniqueness" ethos we have elevated into our basis for entitlement. In our minds, farms are a special little part of America, deserving their own special considerations.
Consumers have no choice other than to retrench. Home prices are likely to fall for the nation as a whole in 2008, the first such occurrence since 1933. And access to home equity credit lines and mortgage refinancing — the means by which consumers have borrowed against their homes — is likely to be impaired by the aftershocks of the subprime crisis.
Consumers will have to resort to spending and saving the old-fashioned way, relying on income rather than assets even as mounting layoffs will make income growth increasingly sluggish. [More]
But how much overlap is there? If the US slides downhill big-time, could it mean bad news for our recently hatched boom?
I don't think so. Ag (well, some of us) has legislated itself a fortress of government-protected privilege. Looking at the political appeal of mandates and the effective way of hiding costs from the taxpayer/consumer; the failure of any meaningful reform to date, and the tiny portion of the economy that farms represents (1% of GDP), I think we are bulletproof.
But that's our real problem. If I can figure this out, you bet the CEOs of agribusinesses that sell to and buy from us can too. Not to mention the holder of the scarcest asset - land.
So, whether national income grows, recovers, plummets, stagnates - pick one - the effect will be muted for my farm. Sure, interest rates could go down/up, but that is not the killer cost like the recent fertilizer doubling. And if meat consumption (loosely linked to income growth) stumbles, we'll just make more ethanol.
Nope, our problems will be 1) inputs, and 2) each other. With a deal this good and secure, farmers will pay about anything to get/stay in the game. We're seeing that already. My prediction is if you look back to your gross profit levels from about 2005, you'll be seeing similar numbers by 2009.
We are already ordering machines, pushing rents, buying land, and competing for inputs which inflates the prices for all these. The equilibrium point should be about the same: if I would grow corn in 2005 for $120/A gross profit (sales + subsidy - variable costs - rent), why wouldn't I grow it for $120 in 2010? Only with much bigger numbers to add and subtract.
The trick will be to maximize the windfall between now and then. Three year rent contracts signed in 2006 would help (although renegotiating for more years is worth a look). Not buying steel during this Iron Rush might be a good idea, but likely negated by higher prices later and it could take a long time to see machinery cool off.
I don't see any sure-fire ways to prolong this brief era before costs rise. As usual, the best strategy would be to own a time machine, and travel back to 2005 to change some decisions. The only other useful advice I have is to bring your "A-game". People will be working hard to to get in on a sure thing or make their sure slice is bigger before the crunch. We may not have an ag recession, but we're going to have a decimation of farmer numbers, I'll bet.
But (long ago) I was talking about a general recession. Is one coming? Who knows?
Better yet, who cares?