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Nearing Bottom Or Waiting For The Other Shoe?

Take your pick among outlooks for the nation’s economic plight.

Take your pick among outlooks for the nation’s economic plight.

Some look at recent positive news – like reduced inventories, a shallower decline in home prices and a surge on Wall Street – and believe the worst of this historic economic recession is behind us. No one is ignorant enough to suggest a few months from now will be just like the good old days of borrowing our way to prosperity. But some hint that, in the grand scheme of things, it won’t be nearly as bad as some believed.

At the other extreme are folks who believe what we’ve seen so far is merely a pale shadow of the economic pain to come, as in we ain’t begun to see the wreck we’re fixing to have.

In between are even-minded analysts who don’t pretend to have the answers, but provide insights that bear consideration. This includes folks like Neil Harl, Charles F. Curtiss Distinguished Professor in Agriculture and Emeritus Professor of Economics at Iowa State University.

In the June issue of that university’s Ag Decision Maker, Harl says, “My biggest concern is that the global meltdown that is being experienced has not displayed the features of a normal economic decline. The drop in economic activity that began in late 2007 appears to be more of a downshifting of the economy, due principally to a revolutionary shift in thinking by consumers about debt, the likely result of companies curtailing the use of high levels of debt and the corralling of patently unwise strategies employed on a widespread basis to deal with risk.

“Consumers, companies and governments have all been living beyond their means. That bubble has now burst. Adjustments in economic activity promise to be profound and far-reaching as the world’s economy comes to reflect a more cautious use of debt at all levels, at least for the foreseeable future. That is likely to affect the buoyancy of the general economy for several years.”

Among Harl’s insights are these points:

  • “Higher commodity prices in 2007 and 2008, and modest debt levels (compared to the 1980s era), have helped the farming sector in many areas of the country avoid the worst effects of the global meltdown and have enabled agricultural lenders, in general, to maintain healthy balance sheets. But the sharp declines in commodity prices in late 2008, the economic and financial woes of the ethanol industry and the falling demand for agricultural products, especially in developing countries, are impacting the sector to a much greater extent in 2009.”

  • “One sobering factor on the demand side (particularly on the commodity futures markets) has been the role played in futures prices by the commodity funds. While the role of the funds in the steep run-up in crude oil prices is now fairly well established, the role of the investment funds in the dramatic climb of agricultural commodity prices (and subsequent declines) is less well accepted. Suffice it to say, it may not have been all demand and supply in the traditional sense.”

  • “As a consequence of several factors, mostly related to demand, farmland values declined in late 2008 and are expected to decline further in 2009 and, possibly, in 2010. Long-term, land prices are influenced by the net income from the farm commodities produced on the land in question. While a replay of land-value declines in the 1980s is not anticipated, any decline affects credit availability, especially for the more heavily leveraged prospective purchasers.”

  • “Depending upon how long the economic crisis persists and how deep the trauma becomes, it will clearly affect credit availability at all levels. Denial of credit in the short run results in economic pain and the disposal of assets serving as collateral, which affects asset values in the markets. Those with weak balance sheets (high debt-to-asset ratios) generally suffer the greatest. The relatively thin band of equity capital on the part of lenders makes the lenders particularly vulnerable.”

  • “The economic state of the agricultural sector (both farms and ranches and rural areas generally) depends heavily on whether the world economy continues to decline. If confidence is not restored, and the financial systems continue to deteriorate, the agricultural sector will likely suffer the effects on a widespread basis. The success of the stimulus packages and the efforts to stabilize the world’s financial institutions are vitally important to the agricultural sector.”
For Harl's complete article, go to:

For a review of current and potential impacts on the economy of federal stimulus dollars, see: “Waiting for Traction” in the June issue of BEEF at