The Comstock Report

Written on:May 1, 2011
 
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David Kruse
President, ComStock Investments (with permission to reproduce)
Copyright 2011@ CommStock Investments, Inc., David Kruse

Someone gleaning through old Commstock Reports found this one that was remarkedly prophetic in context of the changes in economic events that have unfolded since. I have been told that sometimes I am too far ahead of the comfortable consensus and it may have seemed that way in 2003, but events have certainly caught up to what I forecast. This report, in its unedited version, was posted on November 17th, 2003:

“Deflation by generation. My father-in-law tells that not long after he started farming on his own that he bought a new manure spreader. When his father drove on the yard, he expressed strong opinion that my father-in-law splurged, spending too much money, admonishing him that ‘he’d never lived through 15 years where every year crops and livestock were worth less than the year before.’ He was referring to the deflation of the 1930’s and 1940’s.”

Every farmer who’s been in business since 1980 knows what that old farmer was talking about. U.S. agriculture experienced 18 years of deflation from 1980 to 1998. The CRB Index, the Dow of commodities, trended lower during that period as the value of commodities produced eroded and farmers struggled to survive. I believe the wave of deflation experienced by my generation is over.

I believe that the next 20 years in agriculture are going to be starkly different than the last 20 years. Commodity producers are going to move from the bottom of the economic supply chain to the top. The New York Times recently added to its editorial comments
criticizing farm subsidies. They don’t begin to understand farm subsidies and who subsidized who for the last two decades. The American farmer subsidized the American consumer during that period, not the other way around.

U.S. consumers were subsidized with food, fuel and fiber at below the cost of production prices which increased disposable income allowing those consumers to purchase the fun things that drove economic growth as well as underpinned a macro-degree bull market in equities inflating the stock market bubble. The deflation that U.S. farmers struggled to survive for 20 years benefited consumers immeasurably more than it cost them in farm subsidies.

The New York Times is wrong that subsidies did not benefit family farmers or stave off concentration of agriculture. Subsidies lengthened my generation’s period of deflation but without them there would have a swift and total destruction of the economic fabric of rural America, creating a vacuum in which corporate agriculture would have raped and pillaged producers undeterred without the financial lifeline extended by Federal farm programs.

The world is now changing and the change is going to turn the deflation of the 1980’s and 1990’s upside down. U.S. consumers are going to look back at the 80’s and 90’s and realize how good they had it – that it was a gilded era. Farm subsidies provided cheap food to consumers and sustained family farmers. The change emerging into a new major economic trend is that the U.S. consumer is now beginning to encounter competition from emerging economies around the world for food, fiber, and fuel.

The Chinese economy is booming and it is not a temporary shortlived phenomena. It is the beginning of something enormous. Chinese consumer incomes are now growing to levels at which they are impacting demand for food commodities. Chinese industry straining to meet U.S. demand for manufactured goods is consuming enormous quantities of raw materials, imported metals and energy with their surging demand. India is right behind China.

The U.S. trade deficit create from the spending of billions of tacdollars on foreign goods is triggering an economic resurgence in countries that sell us those goods. This flooding
outflow of U.S. dollars is beginning to weaken the U.S. currency which will eventually increase the price of foreign goods to U.S. consumers. Because China pegs its currency to the U.S. dollar, this currency pressure valve is not functioning.

As global economies grow, demand for raw commodities to meet growing numbers of consumers with surging incomes is about to explode. China has emerged as the center of price discovery for crude oil, copper, cotton, soybeans, and iron ore. China is expected to displace Japan as the second largest consumer of oil behind the U.S. in 2004.

The Federal Reserve, publicly stating concern over deflation, has been priming the pump injecting enormous liquidity into the U.S. economy which is beginning to respond. They are reinflating the U.S. economy. Commodity prices that U.S. industry, consumers, and commodity producers, including farmers, have gotten used to for the past two decades are about to be transformed by new demand from emerging economies. It’s time to buy a new manure spreader.”

Of what I wrote in 2003, what of it has not happened? Commodity producers have moved from the bottom to the top of the economic supply chain. The world has changed. The U.S. consumer is now encountering competition from emerging economies around the world for food, fiber and fuel. The Chinese economy is growing their consumer incomes, directly impacting their demand for U.S. and world wide food commodities to meet their needs. And India is right behind China.DK

David Kruse is president of CommStock Investments,Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet. CommStock Investments is a registered CTA, as well as an introducing brokerage. (Futures Trading involves substantial risk. Past performance is not indicative of future performance.)

CommStock Investments, Inc., 207 Main St., Royal, IA, 712-933-9400, www.commstock.com. E-mail to: info@commstock.com


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