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.
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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.
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Is U.S. agriculture rebalancing in favor of livestock?

Green Field with Cows and SheepMichael Swanson, Ph.D., Wells Fargo Chief Agricultural Economist

Nothing beats a widely accepted economic theory getting trampled by a herd of unruly facts. One economic theory is that everyone (including farmers and livestock producers) tries to maximize net profit. Everyone knows that theory doesn’t hold water on the individual basis. Sometimes, the next dollar of income just isn’t worth it to the person chasing it. Probably, the better theory is that everyone wants to maximize income with the least amount of effort, however, they see things in their own little world view.
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Surprised that the market was surprised

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

The most recent USDA World Agriculture Supply and Demand Estimates (WASDE) report surprised the market because it was closer to normal yields than the analysts expected. Why the surprise? The following graph shows that the percentage of the crop that was rated “good” or “excellent” was never more than 3% below the 30-year average. Likewise, the percent of the crop rated “poor” or “very poor” was never really higher than the 30-year average. It would be hard to argue that the statistics ever justified the expectation of a significantly below-average yield. So why did the analysts get so bearish on yield?

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Where is the organic market headed?

Organic Farm Field with sign reading Organic Farm Field Do Not SprayMichael Swanson, Ph.D., Wells Fargo Chief Agricultural Economist

One question that pops up over and over involves the future of organic products. Some people rhapsodize about the virtues and benefits of organic for consumers and the environment, while others grouse about a waste of productivity and foolishness. There really isn’t a way to reconcile these two views, and economics doesn’t add much to the pop psychology of the debate. (more…)


Make allowance for your doubting too

Execution Dominates MarketingMichael Swanson, Ph.D., Wells Fargo Chief Agricultural Economist

The markets await each USDA Crop Progress report with bated breath. Every crop year repeats an endless cycle; too wet and cold to plant, followed by too hot and dry to pollinate, ending with white knuckles about an early frost. The amount of price volatility these different stages generate depends on how close you are to the bottom of this year’s bin.
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Execution dominates marketing (yet again)

Execution Dominates MarketingMichael Swanson, Ph.D., Wells Fargo Chief Agricultural Economist

The 2016 financial performance results from the University of Minnesota Center for Farm Financial Management show a persistent, wide gap in farming results. For the approximately 2,300 operators represented in the Minnesota database, the performance gap remains significant. The good news is that the financial losses for the weaker operators were less in 2016 than 2015. The bad news is that the gap between weak and strong operators remains large. A $260,000 difference existed between the median income of the strongest and the weakest 20% groups in both years.
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A simple story is often simply wrong

Canada, USA, MexicoMichael Swanson, Ph.D., Wells Fargo Chief Agricultural Economist

The agricultural market always churns ahead of the March 31 USDA Prospective Plantings Report. So, it’s the best time of the year for the marketing gurus who flood the farmers with stories and a drought of facts. This year’s “simple” story says that farmers are cash poor and soybeans are cheaper to plant. Therefore, we will see more soybean acres, maybe 4–5 million, and about the same amount or fewer corn acres. On top of the cheaper to plant gem, the marketing gurus threw in the never-ending demand from China in this year’s “simple” story. As I have said before, China is the answer to every story in agriculture.
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NAFTA and agriculture: A great example of complexity

Canada, USA, MexicoMichael Swanson, Ph.D., Wells Fargo Chief Agricultural Economist

With all the talk about renegotiating NAFTA (whatever that means), it makes sense to do the unthinkable and look at the trade facts. Perfectly free trade remains a “black board” exercise for the academics, but NAFTA represents an imperfect agreement to get “freer” trade. Agricultural trade within NAFTA illustrates some of the basic principles of economics such as comparative advantage and exchange rates.
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Sailing into the headwinds to achieve progress

Sailing into the Headwinds to Achieve ProgressMichael Swanson, Ph.D., Wells Fargo Chief Agricultural Economist

I’m expecting 2017 to be another year of rebalancing for agricultural exports. The fundamentals of food and agriculture remain strong with continuing population growth and improving food consumption in developing economies around the world. And, with global population growing at 1.1% annually, and global GDP growing at 2.5%, agricultural commodities have a strong base demand growth in 2017.                               
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