Economist: Don’t try to out-guess the market

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It’s hard enough trying to anticipate the price of milk and the price of feed.

What about global economic policy?

They all have an impact on your business. As Michael Swanson, chief agricultural economist for Wells Fargo Bank, pointed out to an audience at the Central Plains Dairy Expo last week, “We live in a world of interconnected systems.”

There are ways to deal with price uncertainty; it can be mitigated with risk-management tools, such as futures and options. It’s the policy aspects, such as ethanol policy and fiscal policy, where the real uncertainty lies.

The word “policy” is derived from the Greek word for city or body of citizens. Anytime you have people involved, there is uncertainty, Swanson pointed out. 

“People are inherently unpredictable,” he said.

Here are some policy impacts on farms:

  • Ultra-low interest rates have created a weaker dollar relative to other currencies around the world. A weaker dollar, in turn, makes it easier for foreign countries to buy U.S. goods and services ― a boon to farm exports. The farm and energy sectors are primarily responsible for growth in U.S. exports abroad, Swanson pointed out. China has become America's third-largest export customer, buying $103.9 billion worth of U.S. goods in 2011 compared to $65.2 billion in 2007. 
  • Despite government efforts to stimulate the economy following the “Great Recession” of 2007-2009. Gross Domestic Product has not grown as fast as it did following past recessions. One reason: the number of worker hours hasn’t grown much. Furthermore, fewer Americans are working as a percentage of the civilian labor force. Labor force participation peaked in the late 1990s at approximately 67 percent and has since declined to about 64 percent. Why has this occurred? “We have changed a lot of our incentive to work versus not to work,” Swanson said. This, along with flat wage rates (when adjusted for inflation), cuts into consumer buying power. It has already shown up in declining gasoline consumption. That, in turn, affects ethanol demand and the price of corn. 
  • Ethanol policy has encouraged farmers to grow more corn in recent years. If there is a bumper crop of corn this year, as many people predict, it will have an impact on meat prices. When cheaper corn starts coming onto the market in August and September, the poultry industry will have an advantage over the other meats because it can turn out animals relatively fast. Cheaper poultry will put competitive pressure on beef and pork. “We have to anticipate the consumer's response to cheaper corn,” Swanson said.

So, what can dairy farmers do?

Bottom line: While it’s good to know the macro trends, don’t try to out-guess the market, Swanson recommends. It’s better to focus on things you can control, such as getting your cost of production down, he says.   



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