This article analyzes the various components of the current financial crisis and its implications for agriculture. While financial markets have been overrun by steep losses, violent price movements, and irrationality associated with a classic bubble, agricultural markets still have sound fundamentals and their underlying real assets may prove to be a safe haven during these trying times.economic slowdown, global recession, agricultural commodities, demand, financial crisis, Political Economy, Production Economics, Public Economics, Q10, Q11, Q14,

Gobbee, Jose E.

English

Research Papers in Economics

 
International Food and Agribusiness Management Review  International Food and Agribusiness Management Review 
Volume 11, Issue 4, 2008  Volume 11, Issue 4, 2008 
   
Industry Speaks  Industry Speaks 
   
Reflections on the Irrational  Reflections on the Irrational 
   
José Gobbée 
1   José Gobbée 
1  
   
Director of GOAGRO and ZEA GLOBAL  Director of GOAGRO and ZEA GLOBAL 
Tucuman, 141 6A, Buenos Aires,  BA,1341, Argentina.  Tucuman, 141 6A, Buenos Aires,  BA,1341, Argentina. 
   
   
   
Abstract  Abstract 
   
This article analyzes the various components of the current financial crisis and its 
implications for agriculture. While financial markets have been overrun by steep 
losses, violent price movements, and irrationality associated with a classic bubble, 
agricultural markets still have sound fundamentals and their underlying real 
assets may prove to be a safe haven during these trying times.    
This article analyzes the various components of the current financial crisis and its 
implications for agriculture. While financial markets have been overrun by steep 
losses, violent price movements, and irrationality associated with a classic bubble, 
agricultural markets still have sound fundamentals and their underlying real 
assets may prove to be a safe haven during these trying times.    
   
Keywords: economic slowdown, global recession, agricultural commodities, demand, 
financial crisis. 
Keywords: economic slowdown, global recession, agricultural commodities, demand, 
financial crisis. 
   
   
   
LCorresponding author:   Tel: +  11.54.4312.3494 
                  Email: jgobbee@goagro.com.ar                    Email: j
LCorresponding author:   Tel: +  11.54.4312.3494 
gobbee@goagro.com.ar 
 
 
 
 
                                                           
1 José Gobbée is a recognized expert in global food markets and has published in several leading journals and 
newspapers. He has an interesting mix of expertise drawing from both private and academic research set within his 
commercial business interests.   
 
José is currently Director at Agrifood Think Tank and at GOAGRO, a leading company in consulting and 
investments with clients such as Fonterra, Ospraie and Soros AgFunds.  He is also member of the Board at ZEA 
Global and GSS main companies where they develop nursery and trait conversion services for seed firms such as 
Monsanto, Syngenta and others.   
© 2008 International Food and Agribusiness Management Association (IAMA). All rights reserved         
 
175Gobbée / International Food and Agribusiness Management Review Volume 11, Issue 4, 2008 
   
It is difficult to insert a dose of logic while in the midst of irrationality.  Irrational is 
what prevails in almost all markets at this time.  
 
The flight to quality by investing in U.S. Treasury Bonds is odd since they have the 
same incredible quality as ever but still pay nothing more or less than before. The 
fight to cover deficit positions of Index and Hedge explains much of the fall in 
agricultural commodities prices during the last weeks.  Funds withdrew in the third 
quarter approximately USD 50B investment in commodities index funds tied to its 
own holdings according to Barclays Bank. Positions decreased from USD 175B to 
USD120B. 
  
Strong fears of how the global recession will negatively impact food consumption 
also prevail in the market.  Are these fears real?  In the short run world GDP 
forecasters believe that the slowdown will decelerate the global economy ending in 
2009 from 1.5 to 3%.  Developed countries will not grow in 2009 more than 0.5 to 
1%.  Hence, the bulk of the growth forecasted for 2009 should come from emerging 
countries.  
 
 Even with slowdowns resulting from the financial crisis, analysts forecast GDP 
growths of 3.5 and 7 to 8% respectively for countries such as Brazil and China   The 
demand for food and energy in these countries together with other Asian and 
Middle Eastern countries should remain strong. That's why despite the crisis, I do 
not see by looking at the fundamentals a significant slowing in food commodities in 
the short term.   
 
Recall that most agricultural commodities have a fairly inelastic demand, especially 
with those that are part of industrial or processed food supply chains.  “The last 
thing people will do is stop eating,¨ Warren Buffet once said while eating a hotdog 
during the dot.com bubble.  He was responding to a question about why he kept 
investing in food companies and was short in dot.com investments.  
 
Retail grocery-store prices leapt 7.6% last month from a year earlier, driven in part 
by a 14.2% rise in cereal and bakery prices, the Bureau of Labor Statistics reported. 
The USDA expects food prices to increase by as much as 5% next year, following an 
estimated 6% gain this year. 
 
 If we study other bull markets in agricultural commodities in modern history from 
1906 to 1923; 1933 to 1955; and 1968 to 1982; all of them lasted more than twice as 
long as the ag commodity bull market we’ve been in since late 2001.   All previous 
bull markets had significant corrections but the curve was bullish in the long term.  
This suggests that the recent fall in prices of some commodities might be 
temporary.  
 
© 2008 International Food and Agribusiness Management Association (IAMA). All rights reserved. 
 
176Gobbée / International Food and Agribusiness Management Review Volume 11, Issue 4, 2008 
   
On the demand side, few analysts spoke about China’s historic new policy, to start 
raising the income of farmers (740 M people left behind in income per capita).  The 
motivation was to more closely align standards of living in rural areas to those in 
the cities.   The new rural policy, as they call it, will try to reduce emigration from 
rural cities by increasing provincial economic activity.  
 
 Few analysts paid enough attention to Obama and McCain during the last debate 
where getting energy independent from countries like Iran, Venezuela and others 
was of the highest priority. This energy independence, in large part, will come from 
plant biomass.  Obama even compared the challenge to the equivalent of sending a 
Man to the moon, an idea launched by Kennedy.  A challenge which the majority of 
the world once thought impossible to achieve.  
 
 On the supply side we have the little discussed question among economists.  How 
will the developed countries increase their budgets when they are already carrying 
large deficits and announcing bailout plans that increase daily? For example, Great 
Britain (USD692B), Japan (USD100B), Germany (USD780B), Spain (USD66B), 
USA (USD700B plus everything already invested). 
 
 That amount of government intervention may come from three sources (a) 
taxpayers (increasing the risk of recession in the short term), (b) printing more 
money (dangerous for inflation concerns) or (c) reducing the budget in other areas. 
 
 Whatever the source, these countries are the same ones that subsidize the global 
supply of food at approximately USD360 billion a year.  So cuts will have to be in 
order so that their deficits do not become chronic and unpayable.  One strong area 
of government expenditure is in agricultural subsidies.  Therefore, this financial 
crisis should accelerate a trend already underway, the decline in the amounts for 
agricultural credits and subsidies in these countries.  
 
Continuing with the analysis of supply, we see that the American harvest is ending 
well. Stocks are being replenished, (although we do not yet have the final results in 
soybean).  Countries like Australia and Russia are rebuilding part of their stocks 
from previous bad harvests.  
 
On the other side are commodities such as soybeans.  Brazil has not increased their 
planted acreage because high (until this latest devaluation) oil and fertilizer costs at 
the time of planting created negative margins.  According to satellite images in 
Mato Grosso there are approximately 650k fewer planted acres this year and the 
director of Global Sat expects 3.5 M tons less harvest.  
  
If restrictive policy on taxes and exports continue jointly with the decrease in 
outputs prices, the Argentine farmer will face a similar problem. That's why we 
should see a price correction even though global supplies aren’t falling.  In other 
© 2008 International Food and Agribusiness Management Association (IAMA). All rights reserved. 
 
177Gobbée / International Food and Agribusiness Management Review Volume 11, Issue 4, 2008 
   
commodities such as corn, Argentina is the second-largest world exporter and will 
decrease their planted area and output by around 28% as the government has shut 
down exports. Wheat harvest is estimated at 10M tons against the16M that were 
expected by the USDA. 
 
All this makes us think that despite the irrationalities we saw last week, shares of 
Monsanto and Syngenta falling by approximately 30-40% in a week or so, and 
corporations such as Nokia, Motorola, Exxon-Mobil falling 30% to 9 times their 
annual profits, the fundamentals for the upward trend in agricultural commodities 
remain. The latest report from the United Nations predicts that prices for 
agricultural products will continue this upward trend.  Food companies have 
outperformed the broader stock market in the last three months, with their shares 
are down 18% versus a 29% decline for the Dow Jones U.S. Total Market Index. I 
agree with Michael Lewis, global head of commodities research of Deutsche Bank 
and Kevin Norrish, Senior Researcher Commodity Barclay who say the 
fundamentals are still in place and that this is only a pause in the uptrend.  
 
 Nevertheless, I and others believe that the crisis will continue.  The question is the 
length in the pause, will it be months or years?  It is certain that there will be 
downsizing in some agrifood chains (as it is already happening in the Brazilian 
agribusiness which is heavily financed by banks), less credit for ag commodity 
exports and imports (we know of some problems with Russian Letter of Credits), 
some defaults, and high volatility of the market.   
 
I also believe that there will be a scenario of deflation in all assets no matter the 
color or the geography, and huge fiscal deficits no matter the ideology of 
governments.  This scenario will lead at the end of the day to a great inflation 
scenario after the significant injections of money by government and after lowering 
interest rates to their minimum in order to jump-start the economy. 
.  
 The question is the timeframe, and when and how all this will happen.  But in the 
medium and long-term upward trend in agricultural commodity prices will 
continue.  Paraphrasing again Warren Buffet to close this article, “this will be a 
time of crisis but also a time of great opportunities,” and we add—for the food and 
agricultural sectors. 
 
© 2008 International Food and Agribusiness Management Association (IAMA). All rights reserved. 
 
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Industry Speaks Reflections on the Irrational

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