Jolley: The new world of American agriculture
The Kansas City Federal Reserve Bank hosts an annual look at world agriculture and this year the theme was, "The Shifting Nexus of Global Agriculture." The event is aimed primarily at investment banks and attendance is heavy with people you'll never see at the teller's window of your friendly neighborhood bank, unless you're dropping by a very specialized branch office that specializes in wealth management. You'll have the address memorized, of course, when you need advice on where to invest that seven figure trust fund your daddy left you a few months ago.
It's too bad more farmers and ranchers don't attend. The information would do a body good, especially if you're trying to make some long-term decisions about the size of your herd or the amount of corn, soybeans or wheat you need to plant a few years from now. Leasing a few hundred expensive acres to bring in more corn in 2015 might not make sense if the price of a bushel is going to drop by 50%.
According to the prognosticators, that's exactly what's happening. Those near $8.00 bushels of a few years ago will drop to around $4.50; great news for cattle feeders, bad news for corn growers fond of the glory days created by the ethanol mandate.
Grant Aldonas, founder of Split Rock International, a Washington, D.C.-based trade and investment advisory firm, took one of the hardest looks at that 'shifting nexus.' He suggested a significantly larger share of farm profits would come from international trade, a statement that should raise some concern following an earlier claim that our trade policies are about 5 years out of date.
Still, the USDA projects record exports this year, surpassing $143 billion, driven by higher foreign demand from emerging Asian markets and an increase in exports of value-added products. Go ahead and define "emerging Asian markets" as code for China, reportedly now the world's second largest economy and growing at 7.5% or more in a punk worldwide economy.
"Value-added" means grains are falling out of favor while prepared products are the new kid on the block. Think of Shuanghui's recent bid to buy Smithfield. The company wasn't after another supplier of hogs. They grow far more than Smithfield ever could, no help needed there, thank you. They want an assured supply of Smithfield's branded products to feed their very large and fast growing middle class.
The U.S. can keep our hogs. Shipping higher profit hams, bacon and sausage to Shuanghui for sale to millions of hungry, pork-loving Chinese makes a lot more business sense.
Aldonas suggested three reasons for driving export demand; (1) population growth, (2) high economic growth, and (3) urbanization. He forecast a world population of at least 9.1 billion by mid-century and a 5.2% annual growth in average income. Add that to his prediction that the world will be 70% urbanized by 2050 compared to 49% today - a huge number of people who can no longer grow all or a significant portion of their own food - and his ideas are suddenly sensible.
So what will be the long term effect on global agriculture? Aldonas says the rise of global agrifood/agribusiness value chains are the future. So, you think the Monsanto's of the world are behemoths? Today, yes. Tomorrow, companies of that size and scope might be seen as quaint. Pulling together a profitable, vertically integrated ag business that will necessarily have to span the world while spreading the risk of doing business in agriculturally viable but politically unstable regions means access to staggering amounts of capital to develop the rich black dirt of South America's Amazon basin, the Black Sea region and the southern cone of Africa.
Does this mean the end of that small family farm so many urbanites say is necessary to their health and well-being? It will undoubtedly mean a serious contraction of those plots. They might become as rare and nostalgic as today's Amish farms, which are still worked by horse and hand, supplying the family and selling their small surplus at local farmer’s markets. Big 'factory farms' – those tens of thousands of acre businesses often worked by a family unit which has incorporated for tax purposes - are much more efficient at growing crops or raising livestock.
Welcome to the new world agriculture, one driven not by local but by international demand. You shouldn't be surprised, though. The trend line has been there for over a century and the prices your cattle and crops can demand today are tied to what the Asian and Pacific rim nations are willing to pay.
The opinions expressed in this column are solely those of Chuck Jolley, a veteran food industry journalist and columnist.
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