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Of markets, cycles, booms and busts, feasts and faminies...

Posted Aug. 1, 1996

Of markets, cycles, booms and busts, feasts and faminies, and the micro-macro trap in production agriculture - "It was the best of times, it was the worst of times ... we had everything before us, we had nothing before us ..."

Someday in the future we may look back and think this excerpt from the opening paragraph of Charles Dickens's A Tale of Two Cities sums up the situation facing production agriculture in the mid 1990's. Dickens was writing about the blood bath of the French Revolution. The times are changing in American agriculture. The new farm program with the acronym FAIR will impact all of agriculture, not just the major program crops.

Genetically engineered plants and their companion chemicals will change the cost structure and yield potential of crop production. New management and marketing strategies will be employed by input suppliers, crop and livestock producers and commodity processors. Agriculture is beginning a technology management - absence of government support 'revolution' that will turn into a financial blood bath for unsuspecting producers who do not adapt quickly to the new environment.

American agriculture is a huge conglomerate of numerous smaller industries that are individually cyclical in nature. Hence agriculture has been and will continue to be a feast or famine industry we will move back and forth from surplus to shortage conditions.

For the past 50 years the effects of many of the cyclical gyrations have been buffered by the provisions of past farm programs. As producers explore the 'freedom' of FAIR, and weather deviates from average or normal, we will likely see much greater variation in crop and hay production and prices. It will become increasingly important for livestock producers to adjust to the additional fluctuation in feed costs, their major input.

The current boom in grain prices coupled with the cyclical down turn in cattle prices has produced a bust for cattle feeders who did not take action to gain control of feed inputs. Once it became evident that grain was going to be in short supply, astute managers took steps to contract or hedge their grain and feed needs. Booms and busts have the greatest wealth impact on primary producers.

Reaction by producers to booms such as the recent grain price 'explosion' lead to what is referred to as the micro-macro trap. If grain prices increased due to a temporary weather induced supply shortage, then the individual who buys or rents additional land and buys additional equipment to expand production has made an incorrect response.

He has expanded production by adding fixed resources. He will be in trouble when weather moderates and prices fall. On the other hand, the individual who expands production by applying additional fertilizer and hiring part time labor can easily revert back to his normal operation when prices fall. He has responded to the temporary price increase by increasing his use of variable resources.

Making long-term and irreversible responses to temporary price changes can be devastating to the individual producer. If you are going to make long-term investments, be sure you are responding to something more than a short term opportunity. If you make the investment, be sure you can effectively manage production and marketing to handle the periodic price swings that are inevitable.

Thought for the Month: "The real price of everything, what everything really costs to the man who wants to acquire it, is the toil and trouble of acquiring it." Adam Smith

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