The problem in a nutshell...

From Stu Ellis' superb weekly recap of Extension expert reports:

The 2009 calendar year may be the first that ethanol production could be less than the
federal mandates for production.  Chad Hart at Iowa State says the ethanol industry has
suffered financial stress as seen by the Verasun bankruptcy.  He says that means there
will be less DDGS produced and a greater demand for corn by the livestock industry.
• Chad Hart is not expecting 2009 total acreage to expand has it has been for several
years because of the higher production costs and lower profitability.  He says some
forecasts have been for record acreage of soybeans as farmers shift away from high
priced fertilizers for corn.  Hart says prices in the early part of 2009 and weather going
into the planting season will ultimately decide the allocation of corn and bean acres.
• The federal ethanol production mandates makes marketing specialist Jim Hilker at
Michigan State think corn acreage will expand by 2.3 mil. over last year.  He said 2 mil.
more acres will be needed and the ethanol industry will bid up prices to buy some
insurance acres.  He says, “If you look at corn prices relative to soybean prices, corn
yield relative to soybean yields, and you look at the huge drop in wholesale fertilizer
prices, corn will deliver a higher return per acre. Thus more corn acres to be planted.” [My emphasis]

Well, that clears up the picture.

Opinions have ever been thus, of course, but this year seems remarkable for the depth of uncertainty at many levels.  I think it is noticeable because of the underlying fear that now abides throughout the economy.  Agriculture is not immune to this infection, regardless of how well our farm is doing.

In fact, the market for fear is an interesting arena itself right now.

But there is a somewhat more precise definition of a depression (although by no means is it one universally agreed upon by economists): that is a 10 percent decline in real GDP over the course of a year or more. This is the definition that the predictions market Intrade uses. And the latest trade at Intrade just put the chances of a depression occurring at some point in 2009 at 40 percent -- or about ten times more likely than the odds that Norm Coleman prevails in his election lawsuit in Minnesota.
...
What the Intrade traders may be betting on, in other words, is other traders becoming more pessimistic at some point between now and close of the contact -- a "pessimism bubble", if you will.

But here's the real question. Is there a risk of a "pessimism bubble" in the real economy? And if so, are the real markets and the professional forecasters adequately accounting for it?

What will happen, for instance, when the government releases its 4Q GDP estimate? It's going to be an ugly number: -2% if we're lucky, and maybe -6% or worse if we aren't. When this occurs, there will be an awful lot written about it. While the stock market has perhaps priced in this expectation, individual consumers and individual businesses perhaps have not. If they perceive the world as crashing all around them, they may behave in such a way as to actually beget such a catastrophe. We're already to the point where you can't read the food section or the sports section of the New York Times without reading about the recession.

The advance estimate of 4Q GDP is due out on the 30th, timing that intersects in interesting ways with the period during which the Congress is hoping to pass the stimulus package. The number the BEA announces will almost certainly be the worst figure since 1990, when the economy declined at an annualized rate of 3.0 percent in the fourth quarter, and will quite possibly be the worst since the first quarter of 1980, when the economy experienced a 6.6 percent decline. The headlines in the newspapers the next morning will be very grim. A good time for the stimulus to pass, arguably, would be within a few days of the BEA's announcement. Obama could hold an evening press conference after signing the stimulus bill, doing his best to allay the fears of a worried nation -- for fear itself is something we very much do have to fear. [More]

Nate Silver offers some very probing questions with this observations. It is hard to truly gauge the "fear factor" now at work across the economy, but one indication may be the decline in "easy-going-ness".  It seems people are reading between all the lines, and the words as well, seeking unknown threats about to spring on them.  And they are finding them.


Most of the perceived threats have always been there, of course, we just had more confidence in our ability to withstand them. I think we will find after about six months we can do so still.