This fall I went out to buy a new tractor to replace one that I had purchased in 1997. On the first look, the price tag almost made me stagger backwards, but in the process of figuring out exactly what that cost meant in terms of production dollars, the picture began to change. I compared the value of the tractor in 2012-priced soybeans to the value of the tractor in 1997-priced soybeans. The bottom line is this: The tractor that I bought in 1997 cost 6100 bu of soybeans, and 15 years later, the replacement cost 6146bu of soybeans. It’s not that stuff is worth more, the situation is that money is worth less.
A big portion of the price gains which we have seen in the commodity markets over the past few years is the result of the declining value of money. One of the principal tools of the U.S. Federal Reserve following the 2008 financial meltdown has been “quantitative easing.” Basically this means that if they want to stimulate the economy, they print more money. The bottom line is that the more money that you print, the less that it’s worth. The rise in the value of the Canadian dollar over the past four years from $0.75 to parity, is not the result of the loonie becoming worth more, but rather the fact that the U.S. greenback is falling faster.
There is an economic principle that businesses should prosper based on the gains in efficiency, and that’s exactly what agriculture has done over the past few years. We’re certainly seen an increase in our cash revenues due to the increase in the prices of the commodities which we produce, but that’s been largely offset by the rise in input costs. Both the increase in income and expenses are at least partially attributable to the decreasing value of money. Where agriculture has made gains in prosperity is the consistent increases in efficiency. Trend line yields per acre, livestock feed conversions and average daily gains have all steadily risen, and those factors of efficiency have contributed the most to the farmer’s bottom line. If you’re a successful farmer in 2012, you should hang up the MBA that Harvard forgot to give you, because agriculture is business efficiency at its very best.
In terms of managing our commodity marketing going forward, the most important consideration is to raise our expectations to take into consideration that we’re now marketing grain in much smaller dollars. If CBOT soybean futures have risen from $10.00 to $12.00 and the U.S. dollar has declined by 20%, then nothing has happened to the real value of the soybeans. If you’re marketing grain in the same market as you’re purchasing inputs then it’s fairly easy to manage this risk, but be very cautious of very long delivery forward contracts, (two or three years out), unless you’re a prophet with a gifting to call currency trends. Five years ago, selling corn for $4.50 looked pretty good, and getting $5.00 was downright special, but in 2013’s cost base, prices at those levels are going to be tolerable at best. Don’t stick your neck out into the 2014 crop market until you know how the fourth round of “quantitative easing” and the U.S. “fiscal cliff” are going to play out.