🔋Money Grows In Rows
The US should heed yet another warning from the Great Depression era, this time with agriculture.
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The Midwest is known as the world's breadbasket, and the US is still one of the largest agricultural producers in the world. Compared to other countries, the food system is messed up in the US. A country riddled with junk food, harmful ingredients, and high obesity rates, the US is an anomaly to the rest of the world. There are many proposed explanations for the problems I’ve identified, but the root causes go back to a time familiar to readers of The Gray Area: The Great Depression.
In schools today, it is taught that the Great Depression was exacerbated by lack of money which the government could’ve, but failed to provide for it’s citizens. This interventionist mindset has been the backbone of US economic policy since. It is also wrong. In short, expansionary monetary policies in the 1920s created a bubble which, upon popping, resulted in Hoover using every economic intervention possible to prop up the US economy. When this failed, FDR used the exact same playbook, only larger. He was heralded as the savior but was unable to stop the bleeding until WWII (hardly a great next chapter).
A Century Ago
Agriculture is an important industry for the US today, but it is dwarfed by other things like technology, healthcare, and finance. In the 1920s and 30s, agriculture was even more important than it is today. After WWI, Europe's land and economy were devastated. US exports surged to fill the void, yielding benefits to US farmers as they naturally increased production to fill the demand. The US government stepped in to provide cheap loans to domestic farmers, which only added hubris to a rapidly expanding industry fueled by exports.
Before long, a natural economic downturn was catalyzed by the stock market crash of 1929, propagated by loose economic policy during the 20s. In an attempt to protect farmers from falling commodity prices, the Smoot-Hawley Tariff Act was passed under Hoover. This protectionist scheme backfired when Europe enacted retalitory tariffs/embargos of their own, which encompassed agricultural products, now a large segment of US exports. Without European exports, US agriculture producers were left with even larger overproduction than they already had, proppogating deflation and depression.
This blatant mismanagement of the agriculture industry was unfortunately only the beginning of screw ups for both Hoover and FDR during the 1930s. Farmers couldn’t catch a break in this time because the climate took a turn for the worse. The infamous dust bowl of the 1930s destroyed land and disturbed farm products for most of the decade.
Intuitively, destroying some supply could have led to a rebound in prices. However, the overproduction stimulated by the federal government was so large, combined with lower consumer demand from vast unemployment, that prices went down for nearly four years until mid-1933. In this time, many people lost their livelihoods, and their farms were no longer fertile land. The rush to produce farm products in the 1920s caused many to mismanage land, which deteriorated the soil and also exacerbated the dust bowl.
Today
The real foundation for agricultural subsidies was FDR’s New Deal program, the Agricultural Adjustment Act (AAA). The New Deal is thought of fondly by history books, but this program tried to help the industry by keeping prices high through paying farmers not to plant crops and even killing livestock (killing cows isn’t even FDR’s most messed up policy).
Like any temporary government program, the structure and magnitude of these subsidies have ebbed and flowed over the years but remain in full force today. Even passing “crop insurance” programs in 2014, the agriculture industry receives many incentives today. Unfortunately, the subsidies are not divided equally, with 75% of subsidies going to the top 10% of farms, aiding in the death of small farmers over the decades. Further, cash crops like corn, soybeans, and sugar receive billions of dollars and thus are the top produced agricultural commodities, especially in the Midwest region.
The subsidation of corn, soybeans, and sugar is a major reason for the deterioration of food quality in the US. In addition to lower real wages over time leading Americans to search for cheaper alternatives, companies come up with various other uses to make profits, take advantage of the market for cheaper goods, and take advantage of government subsidies. Companies not only produce so much corn that they use energy intensive processes to turn it into ethanol, but they create vegetable oils which have become the de-facto ingredient in American food. While excess sugar is often blamed for increasing obesity rates, it does not correlate. Vegtable oils (seed oils) do.
I don’t have the expertise to confidently opine a radical opinion that there will be another dust bowl in the United States, but similar conditions are happening again. During the Depression, there was a deterioration of soil quality due to the subsidization and overproduction of certain crops. Similarly, the US has shifted heavily into soil-killing monocrop agriculture aided by copious use of industrial fertilizers. Natural resource investors Goehring & Rozencwajg suggest that a particular Gleissberg cycle (88 year solar cycle) could lead to similar agricultural disturbances not seen since the dust bowl. In 1847, ~88 years before the Depression, the US also experienced an extreme drought. Today, there are also concerns rising about drought conditions in the Midwest, which would align with this particular cycle.
Not only have government subsidies harrassed the agricultural market for nearly 100 years to the detriment to consumers and farmers, the consequences have exacerbated the impact of outside forces such as the dust bowl and American health. Both technical and fundamental analysis of the stock market suggest to me that a prolonged period of disappointment similar to the Great Depression era is in store. Could volatility in the agricultural market, especially given the potential for similar retaliatory tariffs to Trump’s policies today, contribute to this outcome? It’s certainly an under-the-radar area to keep an eye on. Until next week,
-Grayson
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I jokingly have been telling my friend in Washington that it's Dust Bowl days in New Mexico, cough cough. I hope we're not actually aligning up with that scenario but this one of the driest winters in the SW in a long time (0.66 inches precip since early August in Silver City, NM).