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Farmers should follow money markets to gauge prospects

By SUSAN MYKRANTZ
Ohio Correspondent

BUCYRUS, Ohio — If you want to know the general state of the world’s economic well-being, just follow U.S. markets. That is the advice of Jim Spreng, a Bucyrus dairy farmer turned investment advisor.

“The market responds to overall economic conditions; it does not drive the economy,” Spreng explained. “It responds to higher taxes, interest rates, war in the (Middle East), China and Europe’s economic gains or woes, elections in China, India and Europe. The market responds to everything, and now it responds immediately, thanks to the Internet.”

Given the huge impact exports have on U.S. farm revenues and the competition from imports such as beef and soybeans from Brazil and powdered milk from New Zealand, he said it is imperative farmers follow the markets.

“Farmers should pay attention to the market,” he said. “They don’t necessarily need to follow individual stocks unless they are investors, but they need to pay attention to the overall level of the market.”

Spreng is a graduate of Cornell University with a degree in economics and a minor in finance. “I farmed from 1974 until 1996 and I had been investing all of my life,” he said. “In 1996, I took my hobby of investing and made it my career, and took my career of dairy cattle and made it my hobby.”

Prior to forming his own company, Spreng Capital Management, Inc., he spent three years with another investment firm. “With clients in 19 states, I don’t farm anymore,” he said. “I am too busy. We still own farm ground but we rent it to my brother.”
As an investment advisor, Spreng said growing up on a farm was excellent training.

“Sometimes you pick the right investment at the wrong time,” he said. “Just like planting in May when everything is perfect, and you receive no rain until August. You did nothing wrong, the timing was just wrong and it is completely out of your hands.”

The good part about investing is someone can recognize this change and still get out with just a minimal loss. “When you have 1,000 acres of corn in the ground with no rain, you can’t get out,” he said. “Also, stocks such as IBM never die like a great cow or horse will do – sometimes before they have repaid their investment.”

Similar risks to farming

Spreng said choosing investments is like seed variety or animal mating selections.

“You are weighting probabilities,” he said. “What is the probability that a stock like General Electric, which has been around for over 100 years, will give me a better rate of return on my money than a new technology like 3-D printing which has tremendous potential for profit or loss? This is just like picking the new variety of seed corn or the new genomic young sire versus the old tried and true genetics.”

Spreng does not recommend any particular stock. Instead, he compares selecting stocks to selecting a particular breed of cows. What works on one farm in one situation may not work on another farm in a different situation.

He said in the past, there was little correlation between the stock market and grain and input prices, and they complemented each other quite nicely from a risk perspective. “Since 2008 and the Great Recession, all asset classes have become closely connected,” he said.

“This means that all assets – bonds, stocks, commodities and gold – are now much more correlated. When one goes up, they all go up in tandem; when they start down, they all go down.”

He said the driver for this has been the democratization of transaction costs or commissions.

“It costs so little to trade anymore, that hedge funds are trading thousands of times a day just trying to make a $1,000 on a single trade,” he said. “The hedge fund managers don’t care about corn, soybean or milk futures. They only see the opportunity to make a few dollars and will buy and sell these things several times in a day.”

Many items, including weather, price and other factors such as food policies, can drive the demand for grain around the world. “Thanks to (former USDA secretary) Earl Butz and Richard Nixon, foreign demand is the main driver for grain,” he said. “The value of the dollar against other currencies is critical. Watching China’s economic conditions is just as important as watching the weather map.”
Spreng said those who are old enough have vivid memories of the crash in the farm sector when Jimmy Carter shut off grain exports to Russia after it invaded Afghanistan in 1980.

 “I always remind my farm clients that with the stroke of a pen, they can be in real trouble financially, very quickly,” he said.
Supply and demand also affect inputs, according to Spreng. “When there is a shortage of supplies and increased demand, it has an impact on prices,” he said. “In that case, the companies that provide products and services to these industries all benefit with more sales and revenue.”
1/16/2013