"Easy Money Times Over" 07/16 10:33
Cautious Tone for Ag Outlook
Feeding the world population won't be as hard as expected over the next
decade some experts forecast, so economists and lenders are bracing for a more
muted farm economy over the next 10 years or more.
By Elizabeth Williams
DTN Special Correspondent
KANSAS CITY, Mo. (DTN) -- Lenders, economists and producers at the Kansas
City Federal Reserve Bank's Agricultural Symposium Tuesday agreed with the
keynote speaker who laid out the case for muted optimism for agriculture in the
next 10 years.
J.P. Gervais, chief agricultural economist for Farm Credit Canada,
recognized world population growth and changing diets are expected to increase
global food demand by 60% (revised down from 70%) between 2007 and 2050, citing
the UN's Food and Agriculture Organization (FAO). "But what people often
overlook is the same FAO report says '(yet) world production would need to
increase at rates much lower than in the past,'" he said.
This summer's expected bumper crops and crash in crop prices has Plains
states and Midwest bankers "cautious," said Brian Esch, president of McCook
(Nebraska) National Bank. "Sobering," is the outlook given by Douglas Johnson,
president of the Guaranty State Bank and Trust Co. in Beloit, Kan.
"The easy money times are over," said Johnson. What has him most concerned
on a micro-economic level is farm families have gotten used to a relatively
high living standard and "sacrificing for the farm" may not be as automatic as
it used to be, noted Johnson. The Kansas banker said he thinks there will be
some attrition out of farming for some under 40, not because they are forced
out (as we saw in the '80s) but because they'll choose to leave.
The Chinese are also getting a taste of a higher standard of living, which
had been good for increasing global food demand. But economist Gervais said
their incomes are approaching levels where they will taper off increasing their
food expenditures and spend more on consumer products. "As people increase
their annual income to $20,000, they spend more money to improve their diet (a
positive for the meat sector)," noted Gervais. "But above $20,000, that's when
the growth in demand for meat starts slowing down."
In China, the largest growth in household income from 2002 until 2012 was in
the $9,000 to $16,000 income level. However, in the next 10 years, the largest
growth is expected in the $16,000 to $34,000 income level, and Gervais worried
that we won't see the same amount of meat demand growth we've come to expect
from China. "I expect the trend for food consumption growth in China to slow
down. Maybe not in the next five years, but possibly in the next 10 years,"
Also on the demand side, ethanol is expected to remain a steady market with
a slight growth rate, "especially if corn prices drop under $4 per bushel and
oil prices stay steady," noted Gervais.
On the supply side, Gervais believes increasing supply through improved
yields will meet global demand. "As we begin to gather, evaluate and use
agriculture production data, precision agriculture will finally deliver
[improved production and profitability]," said Gervais. "The cost of production
will keep going down per acre or per unit." But that information is becoming
more proprietary, so only those with access to the data will benefit the most.
The one bright star in agriculture in the near-term is the livestock sector.
"Demand has remained strong and supplies are tight," said Gervais. But at some
point (in five to 10 years), Gervais predicted, demand growth will level off,
supplies will bounce back and livestock profits will plateau or decline.
The general tone of Gervais' presentation was growth is still possible, but
it won't be linear as it has been in the past few years.
"You won't find a more negative long-term outlook than USDA's 10-year
projections released in February," said Gervais. "But I think the projections
are reliable." Those numbers: average annual cash corn between $3.30 and $4 per
bushel until 2023; soybeans $15.30 to $16.30; wheat $4.35 to $5; market steers
$130 to $150 per hundredweight; hogs around $60 per hundredweight. USDA expects
farm profitability to plateau at lower levels than 2014 but at higher levels
than in the 1990s.
The top may be in, but will the agriculture economy accelerate lower? None
of the lenders that DTN interviewed at the symposium were that negative.
Caution, not panic, was the general attitude.
Will there be a rush to sell farmland if we squeeze the profit out of
agriculture, accelerating a downturn as we saw in the 1980s? "I don't foresee
that happening at this point," said Beloit banker Johnson. "There might be some
shake out. But we're in much better financial shape as an industry, and we're
starting at a lot lower interest rates." So, the downturn shouldn't be as
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