Crisis Investing: U.S. Agriculture

A farmer’s wife despairs...

“I'm so bitter and angry at my government... the Pledge of Allegiance means nothing to me now," she says.

Another broken farmer comes in from the fields to find his wife in a rocking chair, staring into space. “I just think I will kill myself,” she mutters. His marriage will soon end in a bitter divorce.

A young man turns to alcohol and his wife is hospitalized with depression when they can no longer meet payments on the farm they own. A severe drought forced them to borrow heavily. The land has lost so much value, they won’t be able to pay off their debt even if they manage to sell it.

I just spent the morning researching the Great Farm Crisis of 1986. Those stories are a small sample of what I found.

The 70s was one of the best times for American farmers. Prices were high. Profits were easy. But in the early 80s, the bubble burst:

• Paul Volcker’s war against inflation pushed interest rates to 20%.
  

• The dollar’s strength in the early 80s combined with artificial price supports made US grain more expensive on world markets.
  
  
• Jimmy Carter destroyed a huge market for US grain when he prevented American farmers from selling grain to the Soviet Union as punishment for Russia’s invasion of Afghanistan.

Midwest farmland prices fell as much as 60%. Grain prices plummeted. And according to USDA Economic Research Service, farm income, adjusted for inflation, was lower than during the Great Depression.

Supply and demand had conspired to destroy the American farmer. By 1986, rural America was in tatters. Despair was everywhere. Towns collapsed. Bankruptcy rates soared...

Farmer Bankruptcy Rate: Number of Cases Commenced 
by Year Ending Dec. 31

The collapse in America’s farming community is not the point of this essay. It’s what happened next:

Between 1986 and 1988, agriculture prices soared. I looked at charts of soybeans, wheat and corn. Prices roughly doubled from 1986 to 1988.

Low prices made U.S. agriculture competitive again. But because so many farmers had gone bankrupt, there wasn’t anyone left to meet additional demand. Prices had to rise. Anyone with a basic understanding of market forces could have predicted this.

As I write this email to you, crop prices are down again. In fact:

When you adjust for inflation, the grains have never in history been this cheap. If you don’t adjust for inflation, grain prices have recently bounced off lows close to their 1986 prices.

And low grain prices are having the same effect they always do. Look at these comments from a Reuters article on wheat farming, published ten days ago:

“A report issued earlier this month by groups representing U.S. wheat growers, wheat millers and wheat export groups said so many farmers are giving up on planting wheat that the industry is facing a crisis.

‘We're at the point that even with an average crop and average prices there isn't any profit,’ said Dale Schuler, a Montana farmer and president of the National Association of Wheat Growers.

‘This way of life of farming is about over. There is no money in it,’ said veteran wheat farmer Richard Becker.”

The conclusion to today’s essay is this: No one’s interested in agriculture. Prices are low, farmers are leaving the business, and supplies will decline. These conditions are a recipe for a bull market in agriculture... just like 1986.

Investors Can Now Buy Agriculture Through the Stock Market  Why Grain Prices Will Triple

Stocks to play this idea include agriculture processing and retail stocks like Bunge (BG) and Saskatchewan Wheat Pool (SWP.TO). Or consider businesses that help farmers improve crop yields, like Monsanto (MON) or Syngenta (SYT).

Otherwise, check out the mixed commodity ETF – ticker DBC – which is composed of 11.25% wheat and 11.25% corn (DBC also includes gold, aluminum, crude oil and heating oil).

Good investing,

Tom