It's a Different World

March 9, 2012 02:49 PM

Global markets work both ways. Here’s a look at what that means for U.S. producers and future exports

Ag margins are abnormally high, but it won’t last. That’s the single prediction that nearly every economist and expert agrees upon. Burgeoning production around the globe, strong demand and
a global economy that’s intertwined from country to country and continent to continent make today a different world for U.S. farmers.

By 2015, three short years from now, you can expect to have shattered yield goals, thanks to technology and agronomic management. But as those bushels cascade from the combine, you might not be smiling. By then, the price of corn will likely be less than your cost of production. Meanwhile, the developing countries that now represent market growth are continuing to transform.

See a snapshot of global agriculture with our interactive graphic.

In this day and age, it is critical for U.S. farmers to have a wide view and a narrow focus. The wide perspective needs to encompass the global financial shakeout, rapidly shifting ag
production around the world and the impact both have on exports. The laser focus needs to be on positioning your operation for when the bottom falls out of these high-margin times.

"Farmers need to be ready not only to handle the changes in profitability, but to take advantage of the opportunities that will be there when that happens," says Bob Utterback, Farm Journal Economist. "Enjoy these good times, pay down debt and position yourself to ride it out."

In simple terms, be "bullish with caution," Utterback advises.

The domino effect of the global financial slump and debt crisis—and the venerable power of supply and demand—underpin the uneasiness.

"We’re in a global slump with a slow-slog recovery and aren’t sure what will happen," explains Michael Boehlje, Purdue University economist. "One thing is certain. In the last five years, 95 million acres of new land have come into production around the world. Ninety-seven percent of those acres are outside the U.S. The supply response to demand is impressive."

What does that mean for our export future? "The U.S. is not going to win all the export battles, but we’ll stay strong," says Chip Flory, Pro Farmer editor and publisher, as he points to several changes in the landscape:

  • In the past six months, wheat from the Black Sea region has displaced U.S. corn. Asia uses the cheapest source of feed, which is wheat. The Black Sea region deserves watching in corn production as well.
  • Not long ago, China was a net exporter of 600 million bushels of corn; now it imports 150 million bushels—a 750-million-bushel swing that opens up exports for the U.S. and Argentina.
  • Brazil will eventually become the largest exporter of soybeans, but the U.S. will remain strong and competitive with soybean exports.
  • Cotton acreage will continue to slip in the U.S., and countries such as Pakistan, India and Brazil have the potential to step up.

"Nothing changes [the fact] that the U.S. has a stable, improving credit environment and an ag export environment that is stable to positive around the world," says Peter Zeihan, vice president of global analysis with Stratfor.

FJ 020 Different World chart1

U.S. farmers, Zeihan adds, are well positioned to capture the opportunities that political and economic realignment around the world will bring.

One key reason Zeihan remains bullish on U.S. grain exports is that the nation has such a comparative transportation advantage, created in part by geography. For example, it costs 1⁄70th the amount to move commodities by water versus land. Not a single farm is more than 300 miles away from a major waterway that’s part of a highly developed port system.

Zeihan doesn’t discount the fact that the U.S. transportation system needs investment, but he says he firmly believes that it still has no equal. All Brazilian ports combined, for instance, are no larger than the Port of New Orleans.

Financial stability. Another wild card in the export market is global financial uncertainty. "The key question is not whether we will have enough food for 9 billion people but will the world’s 9 billion people have the money to buy food," Purdue’s Boehlje says. "We need to watch the European financial mess and China’s debt crisis."

The world financial structure is on the edge of a major evolution, Zeihan adds. "Against such a backdrop, the U.S. is an island of stability. America will be calling the shots for a while," he says.

Even so, USDA predicts that by 2020 the U.S. will have lost market share in corn, soybeans, wheat and cotton exports. Despite the decline, the U.S. will continue to remain the No. 1 exporter of each of the four commodities, except soybeans. That’s because, USDA predicts, Brazil will increase its soybean exports by 68% while the U.S. will increase its soybean exports by less than 1%. In addition, Bolivia, Uruguay, Paraguay and Argentina are joining the push for more soybeans.

The U.S. will remain the global corn export powerhouse. Its market share will decline, however, from 55% of all foreign shipments in 2011/12 to 53% by 2020. Part of that, of course, will be due to ethanol use, which takes 40% of the U.S. corn crop.

Brazil is forecast to boost corn exports by 31% throughout the period, but what U.S. corn farmers might have to fear the most is the former Soviet Union nations, which are forecast to boost corn exports by 85% in the same time period.

Ukraine has high-quality soils for producing wheat and corn, far higher than Brazil, says David Nelson, global strategist for Rabo AgriFinance.

Should you worry? Not in the view of Iowa State University economist Chad Hart. "Given the increases in [overall] demand, we need the contributions of farmers elsewhere," he says. "We need all hands on deck."


See a snapshot of global agriculture with our interactive graphic.

Global Crop Production

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