Tuesday, September 1, 2015

Is the farm bubble about to burst?

Yes, according to Nashville's own Tom Landstreet:

We’re at the beginning of a multi year retrenchment (collapse in prices) in the agriculture sector. As my clients know, I think the entire agriculture commodity complex is in a historic bubble that was single handedly driven by the corn ethanol mandate, a policy that diverted 40% of the corn crop away from the food supply. Add in the nasty 2012 drought and you have an unprecedented bubble in the sector.

Remember that a bubble is a price movement not explainable by the ordinary forces of supply and demand.  I would explain the movement in prices in the graph above by noting that the original ethanol mandates in gasoline drove up corn prices, and then prices for farm land.  If these increasing prices cause buyers and sellers to form expectations that prices will continue to rise, these expectations can become self fulfilling if buyers accelerate purchases, and sellers delay sales, to take advantage of the expected price increases.

The so called "bubble" pops when prices deviate from their long run value, and enough market participants suspect that the prices are no longer supported by fundamentals of demand and supply.

2 comments:

  1. Apologies for the deviation but the topic has reminded me of another bubble that has already burst, at least in my neighborhood. This bubble exploded out of nowhere, enjoyed a nice run then burst without warning. I am talking about the burger bubble. A few years ago if you wanted a burger in my neighborhood you had to hit the local diner or fast food joint, unless of course you grilled one yourself. Out of nowhere, on a seemingly uneventful day, a burger only place opened up and it was instant success. It was the only game in town for months and was packed all of the time as the demand for greasy burgers grew. It became increasingly difficult to get a seat on the weekends, even as pricier menu items were added. Bubbles involve very large increases in trading volume (Froeb ET all, pg. 143, 2014). Before we knew it a second burger only place opened, then another and another and then several more. They were all over the place, we had the full range from greasy burgers to gourmet chic burgers. The demand was high and so were the prices. Then out of nowhere they all started closing up, the bubble burst; we have returned to the diners and fast food joints to get our burgers. A new bubble if forming though, Tapas places are opening up around town. We already have 3 new establishment, all in walking distance from each other. Just like the burger places that preceded them, they are packed every night and the prices are not cheap. On a lighter note though I have noticed something lately, at least in my neighborhood. There are pizza places seemingly on every corner, many of which that have been in business for most of my 46 years. I guess there is no pizza bubble in my neighborhood, although demand is high and prices have soared over the years. I guess pizza has simply sustained its competitive advantage!
    JG

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  2. Here is another story I read about regarding supply and demand.

    http://wlfi.com/2015/11/20/trucking-industry-changes-fuel-new-product-line-at-wabash-national/
    This was an interesting article that reminded me about how industry changes can effect a company. Wabash National is a company that produces commercial trucing equipment. Along with continue to produce long semi-trailers, they are now going to manufacture smaller truckers. With the demand for more delivery services for such things as groceries, and Amazon purchases, the need for smaller truckers is increasing. The benefit of Wabash doing this is that they are not going to lose out when a smaller truck is needed. These trucks bodies have the capabilities of delivering refrigeration items as well as non-food related items.

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