Wednesday, January 14, 2009

All kinds of destruction...

At Murray State University last night speaking to soybean growers, I followed Jeff Beals, who works with Jerry Gulke at SMS.  After listening to Jerry state he was going to cancel his seed corn order and plant all beans this year after Monday's reports, it was great to have Jeff fill in some the details in their thinking. (Of course, I sure ol' Jer will have revised his position by the TP Seminar next week, but that goes with the job - especially this year)

Anyhoo, Jeff used the term production destruction.  I could not find a credible defintion, but I think the meaning is obvious.  And I think he (they) are on to something, since rumors I've heard seem to confirm how the credit crisis is a pain here, but a game-stopper in places like Brazil, and especially Eastern Europe.  Even the EU, whose governments and investors were diving into places like Ukraine and Georgia are thinking twice.
The European Commission would like to draw Ukraine and Georgia closer to the EU through European Neighborhood Policy agreements on trade, economic aid, energy cooperation, institution building and the rule of law, while leaving aside the long-term question of possible membership of the bloc.
But EU officials are dismayed that Ukraine has done so little in economic reform, tackling corruption and improving transparency and the rule of law to qualify for more assistance.
"Instead of fighting corruption, they spend their time fighting each other," the energy official said.
It was politically inconvenient that both states voiced enthusiasm for joining the EU just as the bloc was suffering enlargement fatigue after taking in 10 new members in 2004. [More]

More to the point for us, a machinery insider told me this morning the rumor is sales of big sprayers from John Deere to Russia/Eastern Europe have fallen through due to lack of credit. US dealers who had been told in December not to expect any inventory any time soon, suddenly found a few (about 800 units) had become available.  

And my dealer told me delivery times on new combines been rolled forward remarkably.  For instance when he called me last July to warn if I wanted to trade up to a bigger machine (I was negotiating for a significant chunk of rented ground that  -  thank God - fell through) I had to have the order in immediately to guarantee fall '09 delivery. [BTW - a great video of where combines come from here]

Not only are machines being delivered in February instead of October, dealers can now have one on the lot.  Last year to prevent big dealers from hogging the output, a signed order with a farmer name on it was required, I was told.

To make a short story long, lots of overseas competition for farm machinery just disappeared due to the credit freeze. If Citibank doesn't trust Wells Fargo (or is that backwards?), I doubt if it wants to deal with First National of Moscow,  especially given the rouble rout.

But my point - and I'm pretty sure I have one - is the credit crisis and commodity bust is destroying commodity production capacity as well - or at least delaying its expansion. Without money, competitors in developing nations are hamstrung in their push to gain competitive tools to match ours.  I think our myopia on our own problems has left this factor unconsidered.

While we complain about the bailout schemes, at least we still have government institutions trying to prime the credit pump, and a currency still (miraculously) in demand.  Most of our fastest growing competitors have nothing faintly similar for help, and capital inflows from rich countries have essentially reversed.

Steel prices are plummeting, ditto rubber, copper, you-name it, but that only helps for machines yet to be built, so add farm machinery to the list of industries trying to figure out how to avoid whacking losses as demand falls. Many of them also have a construction side which is really not much help right now either.

Along with input prices and customer credit issues, ag production could actually be declining for many crops.  And I'm not so sure it will bounce back up very quickly without money flowing a lot more freely.

So bash Wall Street and our finance sector if you choose. But I'm beginning to root for those quasi-rascals. At least they're our rascals.


Anonymous said...

So, John, if we're seeing plummeting production in competitor countries why are we seeing dropping prices in our's? Are our buyers in experiencing the same crunch? If so then farmers also will experience that crunch. AND prices should be rising, or they will, when planting arrives and is way down. Think I'll wait to sell anything!

Ol James said...

"production destruction"
Mr. John, I have heard this term before,(since 1985). It was used in the Manufactured Housing trade, (Mobile Homes). The definition was basically- to flood the market.
Manufacturer's raised production in order to keep units on the dealers lots to offer a varied selection for the buyer. Sorta like auto dealers. The more models or volume, the more likely they were to bring in people wanting different features. So when a particular model was selling good, yeah you guessed it, the manufacturers concentrated production towards a particular model. Doing this offered dealers a volume discount and increased the inventory. You know how overhead goes. Flooding the market may have made the manufacturer's and dealers a hefty profit...but danged if I remember getting any richer...go figure.
So now combines are becoming available..I bet if you play hard to get you can just about name your price or get a better deal.

John Phipps said...


I think one reason prices are soft is demand is decreasing at least as fast, especially for corn.

So my take is while I don't expect prices to skyrocket again, production destruction could help prevent an all-out rout.