One of the great mysteries of the modern world has to be how a company like Twitter, a micro-blogging medium built around delivering short bursts of inconsequential information, can attract a value of $25 billion in its initial stock offering when the company hasn’t turned a profit since it was formed seven years ago — not even once.
In fact, it declared a $70-million loss in its most recent quarter.
You can’t see Twitter, although you can send and receive tweets — as long as they are short and sweet. You can’t hold it, you can’t make it into something else and you certainly can’t eat it. If tweets disappeared tomorrow, life would go on as usual except for the 230 million users worldwide who get a buzz from sharing random thoughts and observations on the 21st century equivalent of the telephone “party line.”
Another mystery is the price of corn, and by osmosis, the price of other cereals, which has been dropping like a stone as those reports of a bumper crop keep rolling in. Don’t get us wrong. We’re not confused by the notion of prices dropping as supplies have increased. What we don’t get is why everyone believed the pundits who a year ago said they wouldn’t.
There were never wiser words spoken than the old expression, “The cure for high grain prices is high grain prices.”
Dan Basse, president of AgResource Co., was brutally frank at a global outlook conference last week. After a wild and crazy decade of growth, no new ethanol plants are under construction in the U.S. Ethanol consumption has hit the so-called blend wall, the maximum it can go without increasing its percentage mix with gas. It is partly because U.S. drivers are consuming less fuel due to the recession and their gradual abandonment of gas-guzzling vehicles.
Livestock feed consumption is declining — herds were downsized due to high feed prices from last year’s drought. Meanwhile baby boomers are eating less meat as they age.
Production for export has grown in other parts of the world, thanks in part to high grain prices pulling more land into production. The world is pulling crops from 72 million hectares more than it was a decade ago, with much of that increase taking place in South America, the former Soviet Union, Africa and Asia.
Now that they are in production, it’s unlikely those acres will be abandoned any time soon. U.S. grain and soy export market share has dipped to its lowest ever at 26 per cent. In the 1980s, the U.S. had two-thirds of the global corn trade. Now it has less than a quarter.
So we’re looking at a scenario not unlike the mid-1980s, with exporters bidding lower to get market share. Last week India — that country we always used to think that needed imports — dropped the price of wheat so it could whittle down its surplus.
We’re now even hearing hints that land prices might have gone a little too high.
“World farmland prices are currently peaking and could correct five to 35 per cent depending on how fast interest rates rise and China’s future import demand of soy grain,” the Basse outlook says.
Unlike tweets, food is tangible. If it disappeared tomorrow, we’d be in trouble. Yet its intrinsic value bears little relation to the vagaries of the market-place.
As farmers have no doubt pointed out to their urban cousins at family gatherings, how on earth does one run a business producing a commodity that can drop up to 40 to 50 per cent in value from one year to the next just because he or she, along with their neighbours, pulled off a good crop? That’s some bonus for a job well done.
And if farmers are looking for help from the speculative investor they shouldn’t hold their breath. Those investors have rediscovered equity markets. Volatility in the corn market is at a record low, Basse said.
According to Basse’s calculations, the returns per acre for corn and soybeans — factoring in production costs, but not land — could fall from a peak of about $420 in 2011-12 to about $30 in 2013. That’s less than 20 years ago. Soybeans are a little better, but not much.
He’s predicting that barring adverse weather, farmers are in for tight times for the next three to five years.
In short, the market is telling farmers to plant fewer acres. We know that’s not going to happen. Historically farmers have responded to that signal by trying to produce their way back to prosperity. Another of life’s mysteries.