‘Easy Money Times are Over’ for Agriculture, Some Analysts Say — DTN

    Lenders, economists and producers at the Kansas City Federal Reserve Bank’s Agricultural Symposium in Kansas City on 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,” said Gervais.

    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 severe.

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