Advances in technology create a deflationary economic environment, and businesses that want to remain relevant must adapt their business models to accommodate that, Kevin Van Trump, author of the Van Trump Report and founder of FARMDOC, Dec. 10 told virtual participants on the 2020 National Grain and Feed Association (NGFA) Country Elevator Conference.

Technology works by making things cheaper and better, hence deflation, he said.

The U.S. Federal Reserve works against deflation, because in that environment, consumers hold off spending in anticipation of lower prices, ultimately leading to recession.

The Fed currently is maintaining extremely low interest rates hoping to create an inflation rate of 1-2%.

Most farmers have built their business models on higher yields, which inevitably contribute to low prices.

The only two strategies for long-term survival is either to become the low-cost producer or to find a highly profitable niche such as specialty crops.

The COVID-19 pandemic has accelerated the process by encouraging consumers to move to highly-technological, digital platforms for making purchases, allowing them to remain home.

The most successful companies are those such as Amazon that cater to younger consumers who adapt new technology more easily.

A parallel example is the 1918 Spanish flu epidemic, which was followed by the Roaring Twenties.

Some additional takeaways:

  • Global ag markets have become demand-driven leading to generally higher commodity prices. Central bank inflation policies lead to an environment where consumers buy now in order to not be left without in the future.
  • Farmers in Argentina, the world’s largest soybean meal exporter, are sitting on their crops rather than sell with high inflation. This plus worldwide demand is pushing soybean prices upward.
  • A combination of poor corn crops and the COVID lockdown have created a huge demand from China, pulling prices up to about $4 a bushel. It would take a huge weather calamity to get prices past the $4.60-4.70 level.
  • Higher corn and soybean prices are pulling wheat prices up, as well.
  • Livestock producers could be in trouble over the long-term, as consumers, especially the young, increasingly adopt meat substitutes. Concern about animal cruelty is driving this.
  • The biggest challenge for grain handlers is whether they can adapt to changing technology and how it affects the commodities they handle.
  • “Businesses become irrelevant when the pace of change outside the business exceeds the pace of change inside the business.”