Monday, December 8, 2008

How will a global recession hamper Agriculture?

I recently commented that I had witnessed the worse week in commodities. Well, it didn’t take long for that to be trumped. The past week has been almost catastrophic. Waves and waves of economic data are now suggesting that 2009 is going to be an extremely difficult year. In November ‘alone’ the US lost 500,000 jobs increasing the jobless rate to 6.7% (the US has lost 1.9m jobs this year) – a move to 10% now seems almost inevitable. As the world’s largest economy – an unemployment rate this high – signals trouble in every corner of the globe.

Lack of job security means consumers are more focused on getting two or three months of paychecks in the bank and getting ahead of the mortgage than spending money. Until job confidence returns, a market recovery is unlikely.
Trying to gauge how deep the global recession will cut into agriculture is extremely difficult. History tells us there will be some impact on agriculture from a recession, primarily on the demand side. As economic conditions tighten, spending on everything – even the essentials like food – declines. But the situation is different now than it has been in the past. There are many more mouths to feed around the world and the world’s middle class has grown considerably. This should help shorten the period of recovery.

What markets could signal an end to recession?

The first is ‘meats’. Just as meat demand is one of the first to wane when economic conditions become tight, it’s also an indicator of recovery. When consumers start ramping up meat purchases, it would signal confidence is being restored on an individual level; which would suggest overall consumer confidence is being rebuilt.

The second is crude oil. This market led the huge bull-run and is likely to lead the next round of buying. As oil prices get ‘cheap’, consumption will eventually rebound. And as demand rises, so will prices. But possibly more important, crude oil has the ability to attract strong speculative buying, which would indicate investor confidence has been restored.

Once confidence turns around, conditions are ripe for a surge in demand. There have been literally trillions of dollars pumped into economies around the world (none of which will find ProFarmer’s post box). This, plus lower interest rates and oil prices would have many households better placed than pre-crisis. However we are not seeing the impact of this because people are saving rather than spending as job security concerns increase.

Commodities are poised to make another bull run as confidence stabilizes and demand rises as prices cheapen. In addition there are already signs that supply is adjusting to lower price levels. But the downside will very likely be ‘overdone’ before there is a recovery. A recovery, which now looks unlikely until at least the second half of 2009.

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