While Wall Street's woes mount, the agricultural sector is booming. The health of that sector and its associated exports provide ballast to the many other parts of the U.S. economy that are sagging.
The Balance of Positive & Negative Forces
As 2007 gets into full swing, there are positive and negative forces at work. The balance of these forces will determine the severity of this cycle's outcome.
Dr. Ed's Forecast
Do you remember the last time that the Fed cut interest rates 125 basis points in eight days? The actions by the Fed, with another 50 basis points as probable in March, will provide the low cost liquidity to keep our economy out of recession. I believe the chance for recession at this time is 50/50. My colleague and Chief Strategist Jay Brew feels that the recession is upon us and will be relatively deep and long. And this is an excellent example of the balance between positives and negatives. Even the Fed is split in their thoughts. My best bet is that the economy will grow at less than 1% in 2007, but not fall into recession. I do believe that every boom cycle produces a build up in pressure that is unsustainable. Slow growth will relieve these pressures.
But we need to look at positives in our economy and not get caught up in so much negative psychology. As many of you know, I not only talk to banking groups, but I also speak to many agricultural groups. Here is a taste of what they are telling me.
Agriculture: The Economy's Unsung Hero
Prices are rising, profit margins are healthy, and markets are strong. Perhaps the best news for the overall U.S. economy is the export picture for agricultural products. While manufacturing exports are susceptible to economic downturns abroad, demand for U.S. agricultural products is less elastic. A country may be able to do without ordering new tractors, but it cannot cut basic grain imports for its citizens.
The Double-Edged Nature of Economic Events
All economic events have inherent positive and negative repercussions. Thus, the good news down on the farm means rising prices on the grocery shelves in urban and suburban America. Those higher food prices are exerting a powerful inflationary pull, along with higher energy and basic metal prices.
Balancing Liquidity and Inflation
Federal Reserve Board Chairman Ben Bernanke and his fellow compatriots in the Federal Open Market Committee have been balancing the advantages of lowering the fed funds rate to help calm the crisis in the credit markets with the disadvantages of further weakening the U.S. dollar and putting the inflation fight on the back burner. In its most simplistic form, the Fed has been balancing the advantages of liquidity against the corrosive dangers of inflation and the weakening dollar.
Farmers Enjoy a Demand-Driven Environment
In the agricultural sector, the weak dollar makes U.S. wheat, corn, and soybeans more competitive, which boosts the U.S. overall exports. While higher interest rates generally hurt U.S. consumers and the manufacturing and service segments, the agricultural sector's profit equation is less dependent on borrowing than it is on overall global demand. That overall global demand trend line has been steadily rising and is projected to continue for at least the next five years.
Farm Income for 2007 Is Projected to Hit Record High
Farm communities across the nation are enjoying a healthy resurgence. Net farm income will reach a record high of $87.5 billion in 2007, according to the USDA's most recent forecast. That $87.5 billion harvest represents a huge $28.5 billion increase from the 2006 level and is more than $30 billion above the 10-year average of $57.4 billion. The previous record was $85.9 billion earned in 2004.
The record income was even more remarkable given that farmers received lower government payments in 2007 and had to contend with record high farm production expenses. Those factors were more than offset by the escalation in commodity prices.
Prices for a number of major commodities have been higher throughout the year, and unexpectedly high for wheat, soybeans, and milk, among others. The higher prices available to U.S. farmers are principally resulting from strong demand from the domestic biofuels industry and from foreign buyers. As a result, farmers have lots of production to sell at high prices.
Moreover, despite higher costs, the values of both crop and livestock production – at $148.5 billion and $140 billion, respectively – are estimated to hit record levels in 2007.
Not All Farmers Shared Equally in Income Gains
Some farmers did not share in the overall record income levels. A number of states in the East, Southeast, and Mountain regions are experiencing drought. For the most part, production in the states affected by drought do not account for enough farm production to have a major impact on national farm income measures. However, farmers in regions with significantly lower production benefited less from high commodity prices since they have less to sell.
Compounding those problems, farmers in these troubled regions also typically suffered from a greater rise in production costs for such things as irrigation and feed/hay. Lower income and higher costs has created red ink for farmers mired in drought conditions.
Farm Household Income Rises
Even with such pockets of adversity, the average household income – from farm and off-farm sources – is expected to rise 7.7% in 2007 to $83,622. About 13% of the average farm operator household income was from farm sources in 2007. Farm income is expected to zoom by more than 30% in 2007 from the 2006 level, while off-farm income is forecast to rise only 5%.
Dairy Farmers to Make Average Income History
Dairy farmers hit the jackpot in 2007. For the first time in recent history, dairy farm households are set to earn the highest average income of all farm specialties – $148,500 –and the highest level of cash receipts – more than $35 billion – on record. That also represents the largest annual increase – almost $12 billion – of any commodity this year.
Milk prices strengthened during the year and are forecast to be up almost 50% to about $6.00 per cwt. Milk production is expected to increase only 2%, due to modest growth in production per cow and herd size.
Tight world supplies of dairy products caused by drought in Australia and slow growth in milk production in the European Union, along with a weak dollar and rising real incomes in Asia – these factors, combined with robust domestic and international demand for dairy products and low inventory levels in major milk producing countries, also have contributed to higher milk prices.
The Value of Crop Production Hits All-Time High
With the harvesting of field crops nearly complete, the value of crop production is forecast to rise by over $30 billion in 2007. That would be the largest annual increase since 1984, to $148.5 billion. For most field crops, 2007 cash receipts are forecast to be a record high.
Biofuels Push Corn and Soybean Prices Higher
The growing use of major crops in the production of biofuels has increased the demand for these commodities and pushed prices higher and higher. As a result, receipts from corn and soybeans are both expected to rise, with corn receipts reaching nearly $33 billion and soybeans $21 billion.
Corn is the prime beneficiary of the increased production of biofuels. In 2007, the price of corn jumped more than one dollar per bushel from the 2006 level to hit around $3.40. Soybeans are also used to create biofuels.
Currently, inadequate rainfall in competitor countries and increased international consumption is reducing world supplies and inventories for corn and soybeans. The combination of reduced food supplies and higher incomes in developing countries with large populations is translating into rising and ever-stronger demand for farm commodities.
In addition, the U.S. dollar has depreciated 25% or more against major foreign currencies in recent years. The lower value of the dollar amounts to greater effective demand for U.S. exports, boosting farm-level prices to a level that more than offsets the increase in production costs. On the other hand, the lower value of the dollar increases the costs of imported production inputs, particularly fuel and fertilizers.
Cash receipts for soybeans also advanced more than $4 billion, reflecting strong market sales in the early months of 2007 due to the record 2006 harvest of 3.2 billion bushels. Higher prices toward the end of 2007 added to the 2007 soybean coffers. The price per bushel of soybeans has been moving toward $9 per bushel. That is $3 per bushel more than the same period in 2006.
Wheat Enjoys Higher Prices
Cash receipts for wheat are expected to rise by almost $3 billion in 2007 to an all-time high of $10 billion. Wheat prices started to rise in late 2006 and continued through 2007. They are expected to average a record of nearly $5.70 per bushel in 2007. This year's domestic ending stocks could be the lowest since 1948/49. Even with current high prices, U.S. wheat exports are forecast to rise in 2007 by nearly 27%, because a number of countries have removed import restrictions or subsidies.
Livestock Exceeds $140 Billion for the First Time
The value of livestock production in 2007 is forecast to be a record $140 billion. Cash receipts from all livestock are forecast to exceed the $100-billion mark for the fifth consecutive year and the previous high by $15 billion.
Cash receipts for beef producers are expected to continue upward in 2007, increasing by more than $1.2 billion to top $50 billion, a new high. Beef supplies in 2007 have been influenced by the continued above-normal cow slaughter due to poor forage conditions, particularly in the Southeast and Southwest, and by floods in the Southern Plains that have driven feed and forage prices significantly higher.
Export demand in 2007 is expected to strengthen, particularly to Korea and Japan, but gradually because of Korea's import restrictions and Japan's age limits on imported beef from the United States. Domestic demand is expected to weaken slightly, almost three-quarters of a pound per capita, to 65 pounds.
Cash receipts to pork producers, which fell in 2006, are forecast to rebound by $400 million to $14.5 billion, with prices remaining steady and production increasing for the seventh consecutive year. Domestic demand is expected to increase modestly, a little over a pound per capita, to 53.3 pounds. Pork exports in 2007 accounted for almost 14% of production.
Exports are expected to remain steady at nearly 3 billion pounds even with lower exports to Mexico due to the weakening of its economy. Mexico is the second leading importer of U.S. pork. Offsetting the lower Mexican trade are larger exports to other countries such as Japan, which is the largest importer of U.S. pork. Exports to Canada have benefited from the weak dollar, while exports to Russia have been due to higher incomes. Swine disease in China cut hog supplies and pushed prices higher.
Think Globally
Whether or not your bank is involved with agricultural customers, I find all of this to be intriguing. And this bright spot will be one of the forces keeping our economy out of recession. Although some feel global competition hurts the United States, agriculture is an example of how we can compete and be successful.