Mike Dwyer, director of global policy for USDA’s Foreign Agriculture Service, never gets tired of giving speeches these days.
The message is the same: Worldwide agriculture is a three trillion dollar business and in the U.S., the agriculture sector is leading the recovery from our most recent economic recession.
When speaking to a recent meeting of the North Carolina soybean, corn, cotton and small grain associations, Dwyer gave the speech for the 17th time, including four continents and 10 countries.
“If you are a farmer anywhere in the world, and you get world prices for your crops, the story is a very optimistic one for you,” Dwyer said.
“When I talk about the prosperity of farming, I’m talking about two primary things: balance sheet and income sheet. Both are doing extremely well,” he added.
Net farm income in the U.S. alone topped $103 billion — a big-time record for American agriculture. Dwyer said this income record is net income, after all the input costs have been figured into the equation.
The other all time high for agriculture is a $2 trillion net equity in farms in the U.S. This is largely due to the rise in price of agriculture’s No. 1 asset — land.
While the value of real estate in the U.S. has taken a dramatic hit during the recession, the price of farmland has risen, because the value of farm land is based on how much income it can produce.
“In my 30-year career in agriculture, I could rarely say agriculture is a top performing industry, and now it is. And, the beauty of prosperity in U.S. agriculture is that isn’t coming at the expense of U.S. taxpayers. Payments from the federal government to farmers are at a 20-year low, down by $15 billion from 2005,” Dwyer said.
The USDA economist said the best is yet to come for farmers in the U.S. and around the world. The 10-year outlook is for continued growth and prosperity, which will be driven by a handful of economic factors globally.
“In the U.S. we are a nation of middle class buyers. If you get a raise in pay in January, your total cost for food will not go up. You may eat out more or you may change your diet, but your overall cost for food will not change much,” Dwyer said
Not the case in emerging countries
In emerging economic countries around the world that is not the case. The Middle Class in China, India and a number of other Asian and Latin American countries around the world is growing at an alarming rate. These emerging markets will be primary buyers of U.S. farm goods for the next ten years, he added.
“In the history of the world there has never been a greater increase of wealth in such a short period of time as we are seeing in China. This plays right into our hands as an agriculture exporter,” Dwyer said.
The recession was a major speed bump for the U.S., Japan and western European countries, China and other emerging economies barely slowed down. That’s important to the U.S. agriculture industry, because their growth has a huge impact on food demand, but regardless of the state of our economy, food demand stays about the same.
“It doesn’t take a degree in economics to figure out that an upturn in demand for good and a level line in food production is going to be good for farmers,” Dwyer said.
In China, there are currently about 125 million households that are considered middle class. By 2020 that number is expected to jump by another 223 million that go from basically subsistence level to middle class. They are going to want to buy more high protein, processed food.
As the dollar goes down, commodity prices tend to go up. The value of the U.S. dollar has trended downward over the past 10 years, pushing the buying power of emerging nations up.
In the first quarter of 2012, the dollar rallied in value, but that’s primarily due to financial problems in Europe, and not a long-lasting trend, Dwyer said.
USDA projections are for a 14 percent decline versus major export competitors over the next 10 years. If these projections are accurate, it will bode well for any American farmer who sells his crop for export and will tend to keep crop value high in both domestic and export markets.
Fuel from cellulosic processes may be the wave of the future, but for the next few years first generation biofuels stocks will continue to come from corn, sugar-producing crops and soybeans.
Around the world, more than 30 countries in the Western Hemisphere have biofuel mandates, trying to replicate what the U.S. is doing with ethanol and biodiesel in the U.S.
To produce first generation biofuels, these countries are going to have grow or import corn, soybeans or sugar-producing crops — like sugarbeets and sugarcane.
The U.S. is the world’s leader in ethanol exports, and the biggest customer is Brazil.
Strange as that sounds, the price of corn versus sugarcane makes the U.S. the lowest cost ethanol producer in the world. Europe wants to be in a similar situation as the U.S. in biofuel production, but they are more interested in biodiesel.
This whole biofuel trend again bodes well for stabilizing prices for oil-bearing or sugar-bearing crops for the next decade.
“The U.S. chalked up $137 billion in export sales last year — never thought I’d see that level in my career,” Dwyer said.
Three major trade agreements
“In the U.S. we entered into three major trade agreements last year and there is more to come. We can either play or we can watch these developing countries play, and it appears our government has made a commitment to play in the world trade market,” he added.
By 2020, the USDA estimates the agriculture export market will top one trillion dollars. Currently, agriculture exports stand at something close to $700 billion, up 150 percent since 2000.
The path of least resistance in liberalizing trade comes from bilateral agreements between two countries. The most difficult path is unilateral agreements that involve numerous countries.
As long as profit is high in the export business, Dwyer contends the growth in bilateral agreements will continue.
Never underestimate the ability of governments to think they are doing the right thing and end up making huge mistakes. For example, in 2008, governments started banning exports of food to be sure they had an adequate supply of food for their country.
“All that did was scare all the major importers of food around the world,” the USDA economist said.
Russia did this again in 2011 with wheat. It caused a price spike in wheat, but depressed prices Russian wheat farmers received for their crop.
What this policy decision did was to lower the profitability in the ag sector, which slows down the supply response.
“It would be nice to say that won’t happen again, but with stocks at such low levels, the conditions are right for export bans and subsequent price spikes,” Dwyer said.
Agriculture is one of the most energy intensive sectors of the U.S. economy. If the price of petroleum goes up, the price of production goes up for farmers.
Many of the same factors that drive agriculture profitability drive energy prices. China, for example, will buy more food, but they will also buy more cars, which need fuel.
“Yields and cost of production is directly tied to the type seed used. There is no better technology in the world than biotechnology.
“We are just scratching the surface on such technology as drought tolerant crops. The payoff will be huge, but the question is: Where is it headed.
“There is no question the demand for food is going to increase over the next decade, and well beyond.
The only two ways to meet growing demand is to increase yield or bring new land into production. Failing to keep supply and demand in harmony could really create high food prices and be a negative factor in world agriculture growth,” Dwyer said.