risk

     Sometimes its hard to tell if recent events, like the generalized global economic meltdown, cast a shadow that is a vapor and will burn off as the sun comes out again, or whether they are a harbinger of a more persistent, new strategic environment in the global market and political system.

     There is certainly a feeling in the air that some substantial things have changed but time will tell if they are persistent or even fully realized.  Some of the things which form the emerging global situation that U.S. agricultural will operate in include:

If you take the long look at the history of hog prices you see two significant shifts since 1950.  These are both upward movements to new equilibrium levels and they happened beginning in about 1971 and 1999 (or 2003 if you see it that way).  Both were the result of rapidly increasing (new) demand for agricultural commodities and were more or less unrelated to the economic movements of the general economy at the time.  The first move in ag prices was the largest in percentage terms (but we are not completely finished with the second movement which began 6-8 years ago).

One of the options available to both livestock and crop producers is the ability to sell their products, and thereby establish a price, well in advance of the delivery of the final product. While this is can be done directly with futures contracts, many if not most producers do it through their packer or grain elevator using what is commonly referred to as forward contracting.

Historically, crop contracts on the Chicago Board of Trade have allowed forward pricing a few years ahead of delivery. For instance, you can price corn in the low $5 a bushel range today out as far as 2010. Livestock contracts have always had a shorter pricing horizon usually a little less than one year to about a year in advance.

     History is about ready to repeat itself in a number of ways.  We are seeing the basic feed grains rise on a global basis in such a way that the global poor (which I have written about in previous blogs) are having serious problems gaining access to the minimal food needs that sustain them.

     Stories are beginning to populate the news about Egyptian bread riots, rice riots in the far east and india and countries pulling out of the global market in agriculture to preserve what they produce locally for local populations.  Exports are being banned so that the inflated global prices don't suck out all the local supplies leaving domestic consumers with a huge and unacceptable increase in food costs.

     There are more bubbles floating around the earth today than I have noticed in my entire career.  Bubbles begin with legitimate economic opportunity but end up crowding out legitmate functions and market signals, resulting in all sorts of distortions and misallocations of resources.  They start harmlessly enough where opportunity exists, for where opportunity exists, investment is attracted to capture a return.

     A bubble happens when capital overpopulates an opportunity and drives its trading value higher than its fundamental economic value.  Since all deviations from reality are at some point rationalized, we can watch at some distance, the natural cycle of a bubble from formation to bursting in a dozen or more on-going markets but some of them we are caught up in more directly.

SwineCast 0256 Show Notes:

• Mo Agastino, Senior Risk Management Consultant at Farms.com Risk Management, shares some advice on how to prepare for the unexpected
• Let's proactively manage odor before our neighbors and our government teach us how to
• Tom Elam, FarmEcon.com, explains the economics of biofuels 

Economists often make the distinction between risk and uncertainty. When they do, most people think they are splitting hairs just for their own personal amusement. This kind of thing gives rise to my favorite definition of economics: "Common sense made difficult".

However, what we are seeing on display in the equity markets is a classic example of the distinction. Risk is normally defined as the likelihood of a negative outcome upon which a probability can be assigned. Uncertainty on the other hand exists when outcomes are out there to which no probability can be reasonably assigned.

I was speaking with a fellow economist today and he reminded me of something he has said for a long time. "You can never get rid of risk." Yes, you can transfer it to others, hedge it (which is the same thing), mitigate it with a portfolio solution etc. but SOMEBODY still is bearing it.

This is a very important basic lesson that is playing itself out in the liquidity crisis which is beginning to make itself apparent in the mortgage markets. In short, when someone takes out a home mortgage, the money is supplied by banks who then sell the mortgages, usually with a guarantee provided by the government, to the secondary market.

SwineCast 0179

• What's Up With Risk Based Inspections
• Corn Prices Affecting More Than Feed
• Net Energy With Rob Payne Of Degussa
• New Ways Of Tracking Campy Behavior

SwineCast 0178

• Fiona Boal of RaboBank discusses alternative fuels' impact on livestock
• Dr. Moira Gunn talks with Phil Luton of the UK's Health Protection Agency about the first non-US research organization to be approved for biodefence and bioterrorism since the events of 9/11.