Saturday, November 20, 2010

Not the end of the world...

What if China does slow down their economy?  Jerry Gulke accurately points out how important China is to grain prices right now.

With no signs indicating a curb in China’s corn demand, there’s going to be reasons to take the market higher. But with weak economic news coming from that country this week, it shows exactly how much control they have over corn and soybean prices, says Jerry Gulke, president of the Gulke Group.
They are the big customer for major U.S. crops.
"China has been the driving force in our soybean economy," Gulke says. "They can make us or break us and that’s not good. I’d much rather see five or six China’s, so if one had a hiccup, we wouldn’t have a problem."
It was likely a small hiccup we saw this week as corn closed about 13 cents lower and soybeans closed almost 70 cents down for the week, on negative news about China’s economy. The Chinese government’s announcement last week that it intended to raise interest rates in order to curb inflation was the driving factor taking prices lower then. This week that rumor was confirmed this week as rates increased ½%.  [More]
Other than an increasing reluctance to check the markets now, how should this news be affecting my decision-making?

I would suggest some other standard to compare to other than the top of the market. The last few days I've been churning out new roadmaps for our farm and the transition to Aaron. I probably need to do this more often, or better yet to get him to check it more often because I've been meaning to be more punctual for the last few decades with little visible result.  But so many LARGE market influences such as funds, climate, and China now active in grain markets facing serious demand growth, losses and gains like we've had in the last few weeks could lead to some serious over-emoting.

I also think a little historical perspective might help our brains, as well. (This is favorite trick for old guys - "I remember back when this happened before blah, blah, blah...)  In this case there are some parallels to Japan that seem appropriate.
 I think the Japanese story has important implications for our analysis of China.  If China indeed experiences a rapid slowdown in GDP growth, the impact on the rest of the world may be far less than we expect.  The real key is the evolution of the Chinese trade surplus.  If it contracts, it will provide an expansionary boost to the rest of the world, not a contractionary one.
Of course that doesn’t mean that the world will grow quickly.  My expectation is that global demand growth over the next several years is likely to be anemic with or without China.  But it does man that a slowdown in Chinese growth might not be the disaster for the world that many believe.
Also a rapid slowdown in Chinese growth does not mean a social or political disaster domestically  It depends on how serious China is about rebalancing its economy.  If policymakers are willing to force up interest rates and wages, most of the adjustment pain will be borne by SOEs and the state sector, not by the household sector.  In that case we might see a slowdown in Chinese consumption growth, but one not nearly as severe as the slowdown in Chinese GDP growth.  Since the Chinese, like everyone else, probably measures their well-being in terms of purchasing power per capita, rather than GDP per capita, a sharp slowdown might not be nearly as painful as we assume.  [More - well worth reading]
Finally, it is good to remember it is now official that we can't predict squat about the global - or the American - economy.  Everybody does, of course, and some will seem to be right occasionally simply by random chance, but otherwise surprise will be the constant factor.

So we're fixing on accomplishing specific goals and letting others try to maximize selling price. If we can continue to solidify our land base, deploy all family assets as fully as possible, enhance our personal satisfaction with our lives, and get me into a new wood shop (and Jan into a new greenhouse) over the next 2-3 years, we're going to call it a win, regardless of whether China takes beans to $25 or not.


Anonymous said...

after deciphering through the "china world" the biggest question or issue (and probably has been forever) is how can we work this too our advantage as now we will never own as much ground as we desire too farm and on rental acreages will any new dollars just be taken up in higher rents...the big land buyers here now are the 65+ crowd who have a large land base already and I suspect are paying cash or a good chunk of the farm price upfront--regards-kevin

xyetay said...
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Anonymous said...

"Finally, it is good to remember it is now official that we can't predict squat about the global - or the American - economy."

I would argue that the same is true regarding predictions of the weather and climate for the world.

John Phipps said...


I disagree, but happily we can both place bets on our farm and reap the consequences.


Anonymous said...

1. solidify land base, this assures that the next generation will have land to farm. 2. deploy family assets fully, the older generation unselfishly cooperates with the younger generation in prudent ag. investments, i.e. land. enhance personal satisfaction with our lives, guess that's what we're all looking for. Sounds like a good plan made possible by trust, respect, and cooperation between the generations. Of course unplanned for death, divorce, and low prices with high inputs can turn the best of plans into a big mess, don't ask how i know this. Farms come and go, at the end of the day the most important thing is the family relationship. It's obvious to me that you have strong, positive relationships with your 2 sons. This more than anything will ensure the success of your family farm, and curiously will also enhance personal satisfaction in your life. just a comment, my best wishes to you john, AC macoupin county , il.