In light of the recent layoffs at John Deere and its suppliers, how does the agriculture sector rate compared to the rest of the economy that seems to be rebounding? How long can we expect sluggish commodity prices?
As the layoffs suggest, a large part of agriculture, in this case the crop sector of agriculture, has seen a significant reduction in prices and incomes over the past two years. This drop in prices and incomes can mainly be linked to a surge in U.S. and world crop production. Crop supplies have built up and currently exceed crop demands. Stock levels are building and crop prices have fallen. Current projections from USDA indicate that these lower commodity prices may be around for several years to come, going through a slow but steady rebuilding process. Those projections are based on average weather and crop production conditions going forward. Significant weather events, such as a drought or significant flooding, or unexpected surges in demand would speed that price recovery process along. Within the last few years, crop agriculture has moved counter to the rest of the economy. During the last recession, crop agriculture was strong economically as U.S. net farm income posted record highs for several years in a row. Those record returns created the incentive for crop expansion, which ultimately led to the surge in production and the reduction in crop prices. Often within agriculture, we talk about cycles, in production, in prices, etc. The events of the last few years highlight the cyclical nature of agriculture.