Re: Excellent Article On Where US Economy & Asset Prices Are Heading
One of the biggest mistakes I ever made in my life was realizing too late how much the computer and the internet would improve efficiencies and productivity in my lifetime. And I was one of the first of my generation to embrace technology, I just didn't see how it could translate into business. I can do in one day on an Excel spreadsheet what a room of mathematicians took a week to do with slide rules only 50 years ago. I grew up near Grumman Aerospace, the guys who made the fighter planes for VietNam and the orbiter that landed on the moon. A neighbor of mine was a mathematician for them and he used to describe the assembly line of mathematicians in cafeteria sized rooms who would each perform one part of an engineering calculation before passing the work on to the guy next to them. Today we just link to answers in another cell in the workbook.
So it does not surprise me that productivity in agriculture has skyrocketed over time, and because of that supply, unit prices have stagnated. I am not familiar with how the work was done fifty years ago but when I saw the video I posted of the guy in Minnesota harvesting his corn with a combine I was astounded that a machine could do all the functions that today's machinery can do.
It all the more reason why I think farmers must do everything they can to optimize income and fight the profit compression they face.
The rest of the world wants to raise their own food because in many of those places its not done for profit. Government land and government workers in socialist economies are what you find in those farms, trying to employ their people while making their countries more self sufficient. Its a losing cause for the most part because they don't have the talent or the knowledge of the American farmer, nor the motivation. But they rightfully see the problems associated with American farming, such as few economies of scale because of the de-centralization of the industry into a zillion smaller enterprises, and hope that the centralization of management and the consolidation of efforts will make them more efficient, allowing them to save money. I doubt they can do it because of the aforementioned lack of expertise, but its a lesson that slowly is being learned by America's farming industry. The same way that 20,000 savings banks and credit unions could not survive and wound up consolidating or failing so too will be the case for industries that lose profitability because they have too much competition and not enough consolidation.
Think about how WalMart was able to bring prices of consumer goods down while expanding their business. They bought out regional competition and finally got so big that they could dictate the price at which they would buy the things they sell. And because they had such buying clout, becoming nearly ever supplier's biggest customer, their vendors had to accept their price or the vendor would not survive. Think about how much the products you buy would go down if there were fewer farm owners who could make larger orders and dictate the terms of their purchases. Presently the farm business is structured to benefit the vendors at the cost to the producers. Eventually the number of producers will shrink as it has been doing, and then production costs will start to recede. Its textbook economics and its played out in so many industries already.
Merge the consolidation necessity with the technology improvements and you get Moore's Law, crafted by one of the fathers of computing and a co-founder of Intel Gordon Moore. In its loosest definition, output doubles every two years at half the previous price to produce. He originally applied the law to computer processors, but as the electronic age has advanced the law has been found to apply to businesses that use technology to make their products. Farming is now feeling the effects of that law. The consolidation that has taken place so farm have made product more plentiful increasing the supply and lowering the price, Technology has added the means to produce more productively.
So as I have been saying, to survive the profit compression and stay in business, the small farmer needs to find as many new ways to generate revenue as possible.