What’s up with ethanol and corn demand?

What’s up with ethanol and corn demand?Michael Swanson, Ph.D., Wells Fargo Chief Agricultural Economist

Demand growth for ethanol in the U.S. stalled in 2018, basically approaching 0%. This lack of ethanol growth is hitting the corn market hard at the same time that the soybean export market continues to struggle with tariffs. Corn and soybeans remain the big drivers of acreage and crop inputs in the U.S.

Stubborn cash rents and choices to be made

FarmMichael Swanson, Ph.D., Wells Fargo Chief Agricultural Economist

One of the many advantages to being Wells Fargo’s agricultural economist comes from having many smart teammates out in the field. It is valuable to get information straight from the decision makers without a middle man massaging the data. One of the things that I am consistently hearing is that cash rents have not been reduced by any significant amount. Farmers have tried to introduce more “flex rents” where they offer a reasonable base rent and an option of increased payments for better than normal yields and/or prices. In some cases, they have had success, but too many landlords reject this risk-sharing approach because there are still competing farmers willing to offer higher cash rents without inclusion of risk sharing.

Smarter than the Market? Not Likely

Food cardMichael Swanson, Ph.D., Wells Fargo Chief Agricultural Economist

Many agricultural producers are making key decisions for 2019’s crop today since they need to line up the acres and inputs months before the planters roll next April. They make the stability of their future cash flow, and survival, hostage to their long-range forecasting abilities. Without a doubt, everyone overestimates their ability to forecast the future.

How is agriculture connected to food?

Food cardMichael Swanson, Ph.D., Wells Fargo Chief Agricultural Economist

As we approach the Thanksgiving holiday, I am struck by the absence of any widespread news reporting on the U.S. crop harvest. We just take it for granted that the U.S. farmer and livestock operators have hit it out of the park again. A quick look at the “Big Three” (corn, soybeans, and wheat) shows that hard work and good weather has the U.S. sitting on top of the world in terms of food supply.

Rates of change rule: In the long term

China TariffsMichael Swanson, Ph.D., Wells Fargo Chief Agricultural Economist

In an odd sense, soybean farmers should feel honored that they are being targeted by the Chinese in retaliation for the tariff dispute with China. Why is this? Soybeans represent one of the only identifiable products and sectors that the Chinese can target. Soybeans accounted for 50%, or more, of the agricultural exports to China annually. It isn’t like the Chinese can stop importing or tariff all sorts of different U.S. agricultural or manufactured products in a significant manner, since they were never importing them in a big enough way to impact the trade flow. No doubt, other crop farmers are being hit by the Chinese response, and they feel that they’re being targeted as well. However, in the end, they don’t end up on the front page of the newspaper because their collective impact remains under the radar.

What is up with the farm ground market?

Potato crop growthMichael Swanson, Ph.D., Wells Fargo Chief Agricultural Economist

There are all sorts of lenders in the world, and they all approach loans a little differently. At the end of the day, all lenders look at the same things no matter what they start with. Some start with cash flow, and others start with collateral. However, they eventually look at both of them for any business because these two things are really the same thing.

It’s a “Money Ball” world

Input and outputMichael Swanson, Ph.D., Wells Fargo Chief Agricultural Economist

Most people who have studied economics have been exposed to the term “production function.” And the majority have forgotten the concept, representing the loss of a valuable tool. At the most basic level, the production function maps what you get out for what you put in. I suppose most people would think this exemplifies a trite concept. However, if you really believe that a strong relationship exists between the inputs and the outputs, you should work hard to understand that relationship. Crucially, this places the control of your business into your own hands. Being able to control the process is about all you can really ask for in business.

Trading places

Crane cargo market and finance economic backgroundMichael Swanson, Ph.D., Wells Fargo Chief Agricultural Economist

One of the current hot topics involves the supposed breakout of trade wars. The most recent development was China’s announcement that imposed tariffs on a wide variety of U.S. agricultural exports to China. This action led to many news stories of how this will hurt U.S. agricultural exports, and also the assumption of big trouble for U.S. agricultural producers. While it never helps the U.S. producer when someone imposes a tax on importing product from the U.S., how much of a problem it creates really depends on the relationship. So, it pays to go to the numbers directly.

Revisiting the 42 degrees in Fargo fallacy

Healthy Full American Breakfast with Eggs Bacon and PancakesMichael Swanson, Ph.D., Wells Fargo Chief Agricultural Economist

I had the great pleasure to visit with my friends in Fargo in January. And, it reminded me of the problem with averages. The joke with Fargo’s well-known weather is that the annual average temperature in Fargo is 42 degrees. However, if you dress for 42 degrees in Fargo, you will be intensely uncomfortable nine months out of the year and dead due to hypothermia the other three. Economists and statisticians often point out that understanding the variation often matters more than the average. I find that this fallacy of the average appears over and over again in the food industry as I travel to producer events throughout the country.

The rate of change

ApplesMichael Swanson, Ph.D., Wells Fargo Chief Agricultural Economist

A recent visit to the Washington State Tree Fruit Association (WSTFA) Annual Meeting hammered home an observation. The rate of change in agriculture and food continues to accelerate with new technology pouring in from the electronics and genetics world. One of the points that I often make about economics is that “it isn’t about us.” Technology firms would never invest the vast sums of research and development funding simply to support agriculture and food. The payback would be too small to risk the capital. But if you create new sensors for the next generation of smartphones, then you might as well use them for everything else.