Bubble-casting...

The flood of forecasts of an ag/ethanol "bubble" is in full spate now. Steve make some good points in his recent post:

So you’ve got the bubble. You’ve got the mood of the country. You’ve got a public with more stuff than anybody ever thought anybody would ever have and they’re demanding more. I don’t THINK I worry about a new Dust Bowl. I THINK that with modern technologies and knowledge—no-till and minimum till and sweeps instead of disc plows—we can avoid that part of the Depression. If, that is, there is enough money in farming to pay for chemicals and fuel. But it’s still worth your time to get a copy of Mr. Egan’s book. He didn’t get much into how good things were for farmers during the 20’s, but he sure did a good job on the bleakness of the 30’s. It might be a good thing to read as you consider how much money to borrow to buy more of this high priced land. Or those $1,200 cows, for that matter. And not to tut-tut, but you should certainly read it before you buy a $399,000 house in town. [More]

He is far from alone. Some ag economists have numbers to back up the "bubble" label.

It is not a case of if, but when, the bubble bursts suggests Iowa State economist Bruce Babcock in the winter issue of the Iowa Ag Review. He says high prices are their own worst enemy because more profits invite more competition and more production. That means lower prices. Babcock says we may have high corn prices now, but in the past 50 years there have only been two occasions when corn prices were high in successive years. Short global crops did the trick in 1973-75, and from 1979 to 1984 prices were kept up with drought and farm policy. [More via farmgate]

I don't dispute the call, but I have learned to be skeptical about the timing. Oracles started calling the 2000 NASDAQ crash in 1995, and the stern warnings about the real estate bubble can be traced back to at least 2002. About 18 months prior to actual evidence of the bubble bursting, the jeremiads became a cottage industry.

So, if we assume these prophets are correct, should we take to the storm cellar now?

Hardly. I think one of the strange developments of our information-juiced global economy is the tendency for trends to last longer than we think they should. Just like most of us could recognize the dot-com and housing bubbles as unsustainable, both markets defied gravity far longer than we thought possible.

I can't offer any good reason for this "Wile E. Coyote" leg-pedaling-after-running-of-the-cliff-but-not-falling phenomenon. It could be that skeptics are finally converted after years of being wrong, fueling the last gasp of the bubble. I know I reluctantly invested in a tech fund in (wait for it) February 2000.

It could also be when early prediction do not come true right away, subsequent warnings are dismissed, and investors and farmers simply double down. I think that is the stage we are in right now.

Complicating such predictions is the deep involvement of an arbitrary (and irrational) economic force: the government. We simply have few historic examples to use as analogs for the curious effects of "thou shalt" economic regimentation.

For those reasons, I'm betting a good 3 years remain before forces collapse our little boom (although the earliest prediction I can find does date to 2004). I am also basing my plans on the remarkable impotence of the livestock and policy reform groups to have any discernible effect on the new farm bill. (I don't mean to be unkind - I stand with them and gave it my best shot to get the government to stop sending guys like me money.) But when legislators from Western states shaft the cattle industry, what use is the NCBA?

Consequently, I am less persuaded about the immediacy of a reality intrusion. During that "air-pedalling" interim, serious money can be made. The upshot is cash rent contracts moving on upward but ending around 2011, and an expectation for $10,000/A prices for 200-bushel corn ground in I-states.

I reserve the right to adjust my outlook (before I tell you guys, of course). And of course, my opinions are for what I think will work in Prairie Township - I do not farm outside my neighborhood, and thus only "threaten" folks I live next to. My opinions are even more useless elsewhere therefore.

All operators will place their bets on when they think this bubble will burst. Some will do it formally with a plan, and many will vote to embrace denial by making no plan at all.

Oddly, this is not a useless strategy, I think. Most farmers will survive to see the other side, and if you are not in the lowest part of the competitive spectrum, you should be one of them. Some sort of plan could maximize your outcome on the way down however.