brent gloy cornell university february 27, 2009 making sense of volatile times governor’s...
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Brent Gloy
Cornell University
February 27, 2009
Making Sense of Volatile Times
Governor’s Conference on Delaware Agriculture
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Agenda
Commodity and Financial Markets Economic Situation Managing Through Volatile Times
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Commodity Markets
Where we’re at Tremendous volatility Uncertainty still quite high Very difficult to predict feed grain prices
How we got here Bubbles pop – financial meltdown Severe recession
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Weekly CBOT Corn Prices 2007-2009
Nearly $5 from high to low
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Weekly CBOT Soybean Prices 2007-2009
Over $8 from high to low
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Causes of the Volatility
Easy monetary policy (cheap money) Loose financial regulation (easy to use
cheap money) Worldwide economic expansion Tremendous run-up in crude oil prices
feeds into grain markets Biofuel policy was additional gas on an
inferno
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When Will it End?
Markets are still in major adjustment Problem is worldwide Macro-economic situation is grim Worldwide economic slowdown
reduces demand for protein and grains
Bottom Line: It is unlikely that volatility will subside until macro-economic situation stabilizes
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How did we get here and where are we at?
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You could see this coming….
“You may recall a 2003 Silicon Valley bumper sticker that implored, “Please, God, Just One More Bubble.” Unfortunately, this wish was promptly granted, as just about all Americans came to believe that house prices would forever rise.……. As house prices fall, a huge amount of financial folly is being exposed. You only learn who has been swimming naked when the tide goes out – and what we are witnessing at some of our largest financial institutions is an ugly sight.”
Warren Buffet, 2007 Letter to Shareholders of Berkshire Hathaway
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The Fed Apparently Adds Social Policy to its Responsibilities…..
“If we tried to suppress the expansion of the subprime market, do you think that would have gone over very well with the Congress? When it looked as though we were dealing with a major increase in home ownership, which is of unquestioned value to this society — would we have been able to do that? I doubt it.”
Excerpted quote from Former Fed Chairman Alan Greenspan. Reported in the New York Times online article “Greenspan Says He Was Mystified by Subprime Market” February 12, 2009
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Financial Markets Filled with Fear
Banks have taken much more risk than their capital can support Credit markets begin to fail
Consumers no longer have access to funds to support consumption habits Structural adjustment of consumption
behavior underway
Result: severe recession
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Fed Responds by Aggressively Easing Monetary Policy
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Unemployment Rate Increases Rapidly
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Consumers Actually Increase Savings
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Consumers Have Little Ability to Expand Consumption with Borrowing
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The Great Crude Oil Bubble Pops
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According to RFA the current nameplate operating ethanol capacity is 10.3 billion gallons with an additional 1.5 under construction above
the current RFS of 10.5 billion gallons
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Where to From Here
Feed grain prices are falling back to food demand levels
Ethanol will slow until mandate again binds This year’s plantings are very difficult to
project Operating costs are volatile as well
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Corn/Soy Budgets for Central Illinois High Productivity Farmland
Corn after Corn
Corn after Soy
Soy after Corn
2009 Projecteda $187 $237 $187
2008 Budgets $621 $689 $354
Source: University of Illinois Crop Budgets http://www.farmdoc.uiuc.edu/manage/2009_crop_budgets.pdf
Per Acre Operator and Land Return
a Projections use corn = $4/bu and Soy = $8.85/bu
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Will Exports Bail Us Out?
?
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Where to From Here?
Feed grain stocks-to-use ratios remain relatively tight
Dollar is still at favorable levels Unlikely that prices will retest previous
all time highs in near future Higher operating costs make a return to
corn at sub $3 levels somewhat unlikely
Bottom Line: modest feed price relief
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Where Does this Leave Agriculture?
Most commodities are going to experience difficult financial times in the coming year(s?)
Let’s look at the financial situation in agriculture
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Very difficult timesDebt levels appear low by historical standards
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The problem is that farm sector assets are dominated by real estate which declines in value during tough times
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So What Has Been Happening to Land Values?
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Now is the time to ask hard questions and make difficult decisions
The Financial Situation In Agriculture
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Managing in Volatile Times
Sound risk management is key Focus on margins – not just price or cost Cost of risk management will be high
Cost management is critical Work on records and business
analysis – must have good information
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Records Must Answer
1. What is my cost of production?
2. What is my cash flow?
3. How do the above respond to changes?
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Managing in Volatile Times
After getting records in order ask: Am I efficiently using my current
resources? Are there resources that can’t be used
efficiently today? What am I willing to pay to carry these
until they can be used efficiently?
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Managing in Volatile Times
Get debt to manageable levels Many farms will be forced to rely on
credit to make it through these times Build a good relationship with your lender Use credit wisely
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Building a Relationship with Your Lender
Good records are a must Give lender confidence that you know your
business Give lender confidence that your plan
makes sense Most ag lenders make decisions on factors
such as repayment capacity, character, capital, conditions, and collateral
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Brent Gloy
Cornell University
www.agfinance.aem.cornell.edu
607-255-9822
Questions