Struggling economies aside, China offers hope for ag demand
It’s easy to be bleak about the global ag economy. Commodity prices are low, changes in South America could boost grain supplies and the Chinese economy is shaky.
Experts agree there are plenty of hazard signs on the road ahead—but there are also a few bullish signals producers shouldn’t overlook. Many won’t come to fruition this year, but as smart decision-makers, farmers should be prepared to respond to global supply and demand surprises and heartbreaks along the way.
“How do you grow an economy domestically and globally when Europe and China have all been pumping money in the money system, trying to borrow prosperity?” says Bob Utterback of Utterback Marketing Services, who notes the U.S. has done similarly. “Could that be the factor that keeps the engine of economic growth in idle? As interest rates drift up, plus an aging population retires and demands services, debt plus an aging population is negative. The positive is cheap commodities. Which will win?”
Changes In China. Economic slowdown in China sparked fears in the business world this past year. Yet Andy Shissler of S&W Trading argues a bigger, more bullish story is set to unfold in the years ahead.
“A lot of this stuff is short-term negative, but it’s going to be positive,” says Shissler, pointing to the removal of China’s one-child policy. “We will see a population boom in the next 10 to 15 years.”
Much of the recent debate about China boils down to currency, Shissler says. Relative to the yuan, the strong U.S. dollar has become a safe haven for investors amid wars and trade barriers. The Chinese economy isn’t necessarily struggling; its self-identified growth projections were unrealistically high, he says. Instead, the influx of migrants into Europe, terrorist attacks and conflict in the Middle East have resulted in fewer people importing products from China, which has hurt the country’s manufacturing sector.
Much of the strain China faces can be attributed to its growth explosion over the past several decades.
“China experienced industrial expansion at a rate it took the U.S. since the Civil War to do, a lot of it through internal financing of debt,” Utterback says. “They’re trying to change their economy from an export-based economy to a domestic-based economy. Change always brings unexpected consequences.”
For agriculture, Shissler expects significant transitions to occur over the next five years. The most noticeable for American farmers is that their demand for U.S. corn will disappear barring a grain shortage, he says. Meanwhile, Chinese buyers will also ramp up wheat purchases from Ukraine and Russia, and cut back on U.S. milo imports while continuing to buy U.S. soybeans.
“As this program price-change comes about, you’re going to see elevators moving grain around and providing more services to farmers,” Shissler predicts. “You’ll see farms get bigger [in China].”
Technology Influences. New tools in China should lead to higher-yield crops and more food independence.
Elsewhere in the world, technology likewise has played an important role in helping farmers do better work. Yet a consequence of that success has been a “deflationary technology cycle” contributing to the commodity price plunge, explains Jim Bower of Bower Trading.
“We’ve got such a high degree of communications,” Bower tells “AgDay” in a recent interview. “The technologies that are available for genetics, for surveillance, for equipment—almost all forms of production have new technologies applied to them. The American farmer is almost too good at what he does or what she does, consequently then driving this price down.”
Fortunately for U.S. producers, Bower says, that isn’t the end of the line. “Eventually, the lower prices will curtail production and increase demand,” he says, “and the cycle will actually flip-flop and go back the other way as world economies get better because of technologies.”
Inflation Ahead. In the meantime, Utterback says, farmers should expect inflation to play out across world economies in the near term.
“I think inflation is coming,” he says. “I think we’re heading toward a period of higher interest rates because of the high debt structure, and that debt structure will keep the growth rate in check.”
China set unrealistically high growth projections and will continue to experience economic expansion in the long term, ag experts say.
Although bulls have argued for months that low prices for commodities such as gasoline would result in more consumer demand, that demand hasn’t arrived. Utterback thinks that’s because expenses such as rising health care costs have eaten into any disposable income consumers would have used to buy products and services.
“The only option governments will have is to increase taxes,” Utterback predicts. “Services will go down and the market will become even more stratified, which leads to conflict. It will be a period of greater violence and volatility.”
As for agriculture, reality holds many U.S. farmers will remain strong grain producers in the face of low commodity prices to offset high fixed costs, Utterback says. The challenge will be getting commodities to countries where consumers can afford to use them. Argentina and Brazil are in a recession, Canada is nearing that point and major U.S. farm policies aren’t likely to be enacted until at least late 2017 or early 2018 after a new presidential administration is in place, he says.
“The story is who’s going to be the farmer in the next 10 to 15 years,” Utterback says. “It’s going to be the farmer who preserved funding—not the young tiger farming 20,000 acres with no cash flow, but the one who’s been a good manager of cash flow.”
Utterback says his bearishness will fall apart if global economic growth moves from its current rate of 1% to 2% up to 4% or 5%.
China Tinkers With Farm Policy Changes
Producers in China will experience significant agricultural policy changes over the next five years, predicts Andy Shissler of S&W Trading. That’s because lawmakers have begun to routinely evaluate new procedures and practices for the first time in China’s history. The U.S., by contrast, has been making policy revisions since the Dust Bowl. Here are just a few factors Shissler thinks could change in the years ahead for China.
Direct Payments. The government might introduce direct payments to farmers over a period of years. That would be a change from today, when the government sets arbitrarily high price floors and purchases grain to go into reserves. The current system is problematic because commodities are too expensive for millers to buy, meaning grain such as corn and rice is left in storage, where it can go bad.
More Ethanol. For years in China, there has been a significant geographic distance between grain-production areas and livestock production areas. New elevators and ethanol plants near farms could help eat up supplies.
Beef And Dairy. Young people in China don’t consume nearly as much beef and dairy as peers in other countries, but changes to dietary guidelines mean demand could build.
Bigger Farms. New policies would ease farm growth, a bullish cue for domestic corn production. China likely would keep buying soybeans from the U.S., Argentina and Brazil.