2009 and Beyond Part II

     Worldwide demand for natural resouces, value-added food items and consumer goods is down sharply as a dramatic slowdown of the world's largest economies continues.  The contraction phase of this worldwide recession is still underway at the beginning of 2009 and will likely continue well into at least the first quarter. 

     One of the reasons it is hard to predict when the recession will bottom out is that there are most likely still "land-mines" of hidden corruption yet to be exposed and absorbed as losses by the remaining productive sectors.  These losses occur in business processes and supply chains that are linked, so that a kind of domino effect or snowballing contraction must take place before the full impact of each phase of the slowdown is fully realized.  This takes time and tends to come in waves, as tipping points are finally breeched.

     At the root of the current worldwide economic failure is a kind of fraud and corruption which began in government policy but was fully exploited by investment banks, mortgage companies and other financial institutions, as well as by companies large and small, owners of natural resources and by the largest group of all, consumers. 

     In layman's terms, a kind of "fake demand" was created by the extension of credit under terms that could not possibly be met.  The definition of demand is the amount of a good a person or entity is both willing and able to buy at each price point.  Willingness was there but "able" was not.  The groundwork was laid by the FED after the terrorist attacks of 2001 with a loose money policy and the framework and fuel for exploiting it was created by Congress in Fannie Mae and Freddie Mac coupled with policies encouraging and guaranteeing lending to people who could not afford the homes and consumer goods which the resulting creative financing allowed them to purchase.

     As we know, the investment banks and other financial institutions as well as hedge funds created financial instruments which were supposed to properly manage the riskiness of the expanded lending practices and ratings agencies improperly passed off on these instruments so that the trust within the system was maintained while a disaster slowly accumulated on the rot beneath. 

     This fake demand created fake earnings, fake land values, fake equity and fake employment.  That is to say, many people's jobs, homes, cars and net worth were a mirage, created by and to support the unsustainable growth and purchase volumes being undertaken.  All of that is now contracting, as it should, to restore integrity to markets and market mechanisms.

     All of this creates a fundamentally different strategic environment for global agriculture which needs to be better understood and accounted for in future forecasts.  Some of the elements of the new strategic environment are:

1. Credit availability will be tight and its extension will be reserved for well-documented enterprises who manage risk around profits, not just the risk of input costs or output prices independently.  With the bankruptcy of Pilgrims Pride (which many agricultural lenders did not anticipate), regulators will press front line credit officers to limit risk dramatically and since there will not be a large number of alternative sources of investment capital to force their hand competitively, we can expect the conservative climate to linger for the next several years.

2. Countries where corruption is rampant in either government or the private sector will undergo more severe contraction and longer term lack of credit availability to build a new future.  Relationships and trade with such countries and firms will be tempting but filled with risk. 

3. There will be increasing pressure on free trade and free trade agreements as an effort will be made to replace them with conditional trade agreements.  Conditions include increased bi-lateral equity in human rights, worker safety, wage equity, environmental safe guards, food safety assurances, animal welfare assurances etc.  This may substantially slow but probably not eliminate the expansion of export growth by the United States since achieving these kinds of agreements and making them stick is very difficult.

4.  There will be increasing pressure globally to establish supply chains or integrated processes across borders.  The system of import/export companies acting as arbitragers and distributors will likely gradually give way to integrated supply chains between nations.  What you have to imagine is what happened after 1998 in the United States pork industry.  The conditions under which credit was extended post 1998 were dramatically redrawn to prevent the complete collapse of equity in the production sector.  There exists today a similar risk for equity from export collapse for U.S. pork.  It is not hard to imagine that a loss of export markets for the U.S. pork industry would cause an equity loss even greater than the events of 1998.  Therefore, credit to operate will force the development of reduced risk mechanisms to keep products flowing.  While a disease may overwhelm the efficacy of these mechanisms to keep products moving in export markets, integration allows for transparency of supply and demand, and a more perfect matching of attribute demand and supply, at least in theory. 

5.  Its back to the basics in food purchase and preparation.  As unemployment in the U.S. moves closer to double digits and the media inflame a depression outlook, consumers can be expected to at least initially shun more extravagent value added and economically unnecessary food attributes like "organic", which is headed for a double digit decline in demand at the present time.  More meals prepared at home will continue to dampen the restaurant outlook in many cities which tends to hurt beef and chicken more than pork simply because of their disproportionate representation on the lunch and dinner menu.