Tuesday, April 18, 2017

Commodity Trading Is No Way To Run An Economy

         South Dakota Governor Dennis Daugaard once told me that as a law student in Chicago he worked for a while as a clerk/runner on the floor of the Chicago Mercantile Exchange.  It might have been about the same time that I was there, getting a grip on the livestock markets as I prepared for my brokerage operation here in South Dakota.  The decades I spent trading stock options and ag futures, both in the Windy City and right here in the Black Hills, taught me a lesson that apparently was lost on Daugaard--don't bank on the commodity markets as the basis for making your financial decisions. 
     That truism is common knowledge in the culture of the trading world, but when it comes to South Dakota's financial governance and planning it's an axiom that has no relevance.  Just a
Trading Floor Madness
Or Budget-Planning In South Dakota?
few day ago, RCJ ran a story titled "State revenues come up short," which reported that various state tax revenues for the first two months of this year have missed their cumulative targets by about $10 million.  Some sales tax loss to e-commerce might be part of the issue, but I'd be amazed if planners haven't accounted for the relatively steady growth of internet sales when they made their budget projections.  If they haven't, they need to be fired.  In reality, State Economist Jim Terwilliger's explanation for the shortfall goes right to the heart of the problem inherent to commodity-based budgeting.  Noting that our state's farm income fell from $3.8 billion in 2011 to $800 million in 2016, Terwilleger fatalistically said, "you're seeing some adjustments going on in the ag economy.  It takes time to adjust to those lower prices."  

     A $3 billion hit, ratcheting steadily downward in 5 years to an economy the size of South Dakota's calls for an awful tough "adjustment."  But the fact is, swings in commodity prices have been the norm since the days when ancient Greek merchants haggled with Phoenecian traders over future prices for grapes and olives.  Modern day state officials held captive to those swings need to examine the concepts of risk management in order to avoid the pain of these endless and inevitable price cycles.  Ratcheting up their dedication to spreading out the state's economic base, mainly via
Yup.  That's What We Need
In South Dakota
manufacturing is probably first on the to-do list, but we've been hearing that for years with not much to show for it. A more practical and realistic approach is comprehensive tax reform, weaning the state away from from its dependence on the vagaries of sales taxes and spreading the tax burden out more equitably. By "comprehensive" I mean that everything--as that great Republican dealmaker Donald Trump likes to say--"is on the table." Space constraints intervene for now, so I'll explore the tantalizing concepts of "comprehensive, everything, and on the table" when it comes to tax reform next week.  



  1. My objection to requiring on-line companies to pay a state sales tax stems from my belief that state legislators would ratchet up the tax for internet sales. Unfortunately, a uniform tax for every state would require the US Congress to admit that the term 'United States' became singular with the end of the War of the Rebellion.

    1. I think blaming sales tax losses on e-commerce is probably a dead end because the drift is toward internet retailers collecting sales taxes. For South Dakotans it will continue to be a matter of floating with the tide of commodity prices until some real reform takes place.

    2. I agree, but I avow the temptation to 'strangle the golden goose' is strong. Especially inasmuch as those who buy on the internet are, in contrast to folks in brick and mortar operations, faceless and thus ignorable.