Slow Economic Growth Impacts Ag
Thursday, August 22, 2013
filed under: Marketing/Risk Management
Terry Barr, a nationally recognized ag economist and senior director for CoBank’s Knowledge Exchange Division, sees the U.S. economy growing slowly in the next three years as the U.S. continues to recover from recession. He says this will have a big impact on agriculture. Barr spoke to attendees at the 2013 NSA Summer Seminar in Medora, N.D., in June.
According to Barr, 60-70% of U.S. economic growth comes from consumer spending. Debt, unemployment, home values, and political uncertainty will limit growth in the next three years, and commodity prices will be influenced by this to a greater degree than in the past, he said.
Over the last five years, crop shortfalls in the U.S., South America and the former Soviet Union have protected agriculture from a lot of the economic turmoil going on in the world economy, Barr said. However this will change as he believes all commodities prices will remain unpredictable in the next five years as world markets deal with a transition out of the major financial upheaval that has existed since 2008.
For oilseeds in general, Barr sees the world market balancing a record large South American oilseed crop and Chinese demand this marketing year. This year’s massive global soybean crop will lead to a buildup in global ending stocks increasing from 30 million metric tons (MMT) to 37 MMT. The stocks-to-use ratio will also increase from 25% to 27.5% by the end of the 2013/14 marketing year. Barr adds, “If South America has another record crop in 2014 and Chinese demand slows, this could lead to weakness in oilseed prices leading into the 2014/15 marketing year.”
So what is the outlook for oilseeds going to look like over the next five years?
Demand rather than supply will be the key market driver in the next five years. China and India will account for 70% of the increase in the middle class from 2000-2030. Barr says their “ability to pay” will set global market prices and drive oilseed, oil and meal demand. China will remain the most important market in the near term. Its domestic oilseed production is not keeping up with demand, and this will force the continued growth of imports for the foreseeable future. However, any change in Chinese economic policy can change this overnight.
In addition, the U.S. dollar is now starting to get stronger against other major currencies. This is an important factor as “we are more export dependent than we have ever been because of current crop production levels,” Barr affirmed. “This could pressure U.S. exports as our products will be more expensive than our competitors.”
Ag will stay “a bright spot in the U.S. economy,” Barr predicted. “Farm income will remain strong, but volatility won’t go away in commodity prices. Producers will have to spend a lot more time on risk management over the next five years, so positioning themselves to be good farm managers will be the best way to deal with this volatile economy.”