Ag's boom waning, economists warn

Markets
Jul 19, 2013
by DTN

Get ready to say goodbye to the latest bonanza years of grain agriculture. The world may be adding billions of new mouths to feed over the next few decades, but population growth alone isn’t enough to sustain record-busting crop incomes that made farmers and landowners feel like princes the past decade, a growing number of ag economists and business leaders warn.

“World population is leveling off and about to decline,” Pat Westhoff, director of the Food and Agricultural Policy Research Institute at the University of Missouri, told an audience assembled for a Kansas City Federal Reserve forum on global agriculture last week. He’s not just skeptical that global population growth over the next few decades is overinflated: Farmers here and abroad have ramped up corn and soybean production globally since 2000, putting a lid on how high prices will be able to go in the near future. This excess production could swamp markets at times.

“I won’t prejudge what will happen with this year’s U.S. corn crop, but in the future, $5 corn will be the norm, not the exception, and we’re very likely to average below $5 corn for the next five years,” Westhoff said, based on the institute’s longterm crop and economic models. The U.S. could see spikes to $6-7 corn if yields should fall from some widespread crop disaster, “but if the crops are as big as some think, we could certainly see $3 corn again ... something that would cause a lot of consternation in agriculture.”

Michael Swanson, a senior vice president and consultant with Wells Fargo, is another population skeptic. He said analysts need to dig deeply into United Nations’ forecasts, since they include such improbables as Nigeria having a population density eight times that of China over the next few decades, something he seriously doubts will happen. China’s population will also age dramatically by 2030, meaning it may not be the engine for growth some counted on. That’s not the only factor making him less optimistic about future ag returns.

The Federal Reserve’s battle to revive the economy has driven exchange rates to artificial levels, or about 30 percent below 2002 levels. “The last seven or eight years, we’ve underestimated how weak the dollar has been and our ability to buy market share in exports,” Swanson said.

Most worrisome to Ray Wyse, a senior director at Omaha-based Gavilon, is that the U.S. could easily become the storehouse for global grain markets of the future, not the price dictator.

“The trend is not your friend,” Wyse said. U.S. corn exports commanded 80 percent of world trade in the 1990s, but slipped to 20 percent last year, he noted. It may bounce back with a bigger crop in 2013, but longer-term, “I’m not sure if we’ve found bottom yet.”

Cheap grain acres are on the verge of production throughout the world. The former Soviet Union houses 74 million acres of idled land that could easily come back into production once farmland ownership laws are clarified. Brazil’s Mato Grosso added enough winter corn production as a double crop in recent years to equal Iowa’s corn crop, Wyse said.

Wyse also expects a step change in world yields once biotech seed is more widely adopted globally. For example, Monsanto’s efforts to develop short-season corn varieties for Canada will encourage double-crop corn in Mississippi and triplecrop corn in parts of Brazil.

“Biotech will move the needle a lot when the rest of the world adopts it—not just the Americas,” Wyse said.

In the past, U.S. corn markets swayed world prices, but U.S. corn acres as a percent of world production peaked in the 1980s. Since 2006, “the world’s farmers have responded heroically to high prices” and boosted their production capacity, Wyse said. “Now prices will be increasingly determined outside of our borders.”

Westhoff agreed that concerns about overproduction are warranted. “We’ve been a little sanguine the last few years, but we’ve got to find a new source of demand to keep prices from going down,” Westhoff added. Just two countries—the U.S. and China—accounted for the biggest demand shifts so far this century. But eventually, the ethanol market and China’s soybean demand will be accommodated. “If you have to invest 10 or 20 years into the future, you’ve got to think where those crop prices will land.”

Whether this low price scenario hits this year or next isn’t the question, others said. “People spend too much effort on forecasts, or the exact time and day when prices will move. They don’t spend enough effort on anticipation,” Swanson stressed.

Policies set by Congress or the Federal Reserve can change quickly, by a simple vote.

“Farmers can’t change the market, just themselves,” Swanson said. Too many U.S. producers have overpaid for cash rents and farmland with marginal production capacity, he argued. To prepare for the bear market ahead, he thinks discriminating producers should drop acres with high cost of production, or invest in drainage and irrigation to improve those assets.

Nobody knows exactly what prices will be in the future, he stressed. “Knowing that the average price of corn the next five years will be $5.50 is useless, unless you have a plan to deal with both $7 corn and $3.50 corn,” Swanson said. — Marcia Zarley Taylor, DTN Executive Editor

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