Farm Equipment   recently hosted a webinar sponsored by Pinion forecasting the financial picture for the farm equipment industry for 2023 and beyond. The webinar featured Pinion president, Marc Johnson and the ag marketing consulting manager for the company, Brian Holder. Here are 5 key economic concepts that Holder focused on to help get a better grasp on your financial forecast for the future.

1. The Everything Bubble

Holder says that to get a clear financial forecast for the future, it’s crucial to fully understand what the current financial situation is like. Using the “everything bubble,” according to Holder, is a good way to visualize the past, present and future of the financial state of the world.

“The everything bubble is what we just went through from early 2020 to about the middle of 2022 where everything just worked,” Holder says. “The everything bubble made every business investment decision look genius because everything was just going up and everything was booming. But now, we’re in sort of an everything inflation or everything recession bubble.”

Because we are so close to where this everything bubble ended, Holder says it’s extremely important to recognize that what worked 2 years ago might not work this coming year and that it will be necessary to develop new, specific strategies that can help drive business forward.

2. Supply & Demand and the Effect of Investment Money

Commodity prices increase typically as a result of supply decreasing, demand increasing or a perfect combination of the two. Conversely, commodity prices tend to decrease when there is an excess of supply or a decrease in demand for that commodity. That is the predictable part, according to Holder. But when investment money comes into play, it can be a bit more challenging to get an accurate read on the financial situation.

“We can look at supply and demand and we can look at generally without outside investment money, we know about what fair value has been historically and have a good idea of where it's probably going to land this year,” Holder says. “When investment money gets involved, it changes the game. When we get a big influx of outside investment money, we tend to trade commodities at higher than what I would call fair value or higher than economic value.”

3. Predicting Inflation Patterns & Navigating Uncharted Territory

Coming up with an accurate financial forecast for the future involves a lot of math and numbers, but one of the most important steps, according to Holder, is simply paying attention to patterns and making reasonable conclusions — even when dealing with unexpected scenarios. Holder uses the 2020 COVID-19 pandemic as an example of this.

“All of a sudden, Covid-born food security fears struck the hearts of the leaders of the world in places like Egypt, China and India. Suddenly they started buying commodities as quickly as they could and we started seeing a big influx in the middle of 2020 of huge demand from places where we hadn't seen it before,” Holder says. “We started selling a tremendous amount of corn to China and we hadn't been selling much corn to China before. So all of a sudden, we increased that demand just out of nowhere.

“The second thing that happened, by sending everybody home, the federal government and the federal reserve decided, ‘hey, since we’ve got everybody at home, we better start infusing this economy with some cash, otherwise this economy is going to collapse.’ So they started pumping money into the U.S. economy and that was a very easy thing for economists to look at and go,’ you know what? We're gonna see inflation.’”

4. Premium Pricing

When investors want to buy for a reason that is outside the scope of normal supply and demand, the result is what Holder calls premium pricing, which is when a big influx of money from outside investments comes in and drives prices skyward.

“What happens when you get premium pricing? In our world, we have a saying that high prices are the cure for high prices. And when you have high prices for long enough, it creates a couple of things.” Holder says. “The first thing is that it creates negative margins for end users. And so end users, in order to make money, they will learn to substitute or cut back. That will eventually lead to lower demand.

“The second thing premium pricing does is that it creates more competition across the world. We're gonna see more acres going out to corn and soybeans this year and to wheat. More acres eventually leads to higher supply. That combination, again, leads us back on a path to lower pricing.”

5. Principle of the Path

Holder has been talking to producers for the last several months about these economic concepts and what it means for their production and their business models. One term that he has been educating them about is something known as the “principle of the path,” which states that direction determines destination.

“I always like to look at market cycles and say where are we at and what is the path that we're currently on? And there's really only three things that you have to look at,” Holder says. “There's the investment money, and then there's supply and there’s demand. When people are buying, typically that's a path towards higher pricing. When they're selling, that's typically a path towards lower pricing.”

Click here for more Industry News.