by Christophe Pelletier
Although change happens all the time, in some areas human
nature demonstrates great constancy. One of these areas is how Pavlovian we
react to market fluctuations. Agriculture knows many cycles, most of which are
as much the result of human nature as the mechanics of economics.
In the time of high commodity prices that preceded and
followed the Great Recession of 2008, one of the main questions I was asked
about the future of agriculture was to give predictions about prices and
profitability of agriculture. This is a tricky exercise if there is any. So
many factors can influence both supply and demand that it is unrealistic to
believe someone could predict with certainty future prices. Price predictions
would only be meaningful by predicting costs at the same time.
Despite the
difficulty, many economists venture in the exercise. The levels of accuracy are
disappointing. Past research on economists’ and gurus’ predictions has shown
accuracy levels of 47 percent on average. In other words, tossing a coin would
statistically be more accurate by a margin of three percent.
When “predicting” the future, it is more useful to focus on
patterns rather than trying to miraculously try to pull the right numbers.
Human nature is rather predictable. When prices and profitability are good,
suppliers want to produce more, because they expect the result to be even
higher profits. It is intuitive, and it would work fine only if the competitors
did not follow the same thinking. Unfortunately, they do and the result is an
increase in supplies. As it takes two to have a supplier-customer relationship,
the flip coin of the high price medal is that buyers are less warm to buy more
of what increase their costs.
To read the rest of Christophe's insightful column, click here to view it on our online edition of May's Milling and Grain magazine.
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