Minding Ag's Business

About 400 ag economists and business leaders assembled at the Kansas City Federal Reserve last week to assess agriculture's global future. It was rare to find a bull among the crowd of bears (see related story, "Get Plan B Ready" in Farm Business). Only extreme weather and climate change could derail what most see as an era of surpluses on the horizon.

With sometimes shocking analysis, speakers outlined a number of reasons why U.S. grain and oilseed growers should be drafting contingency plans to cope with periods of much lower prices in the future. Most U.S. farmers could weather one poor season, but several speakers worried about real risks from back-to-back years of below-cost-of-production prices. Among points worthy of your attention:

--Don't bank on population growth alone to raise farm prices. Pat Westhoff, director of the Food and Agricultural Policy Research Institute (FAPRI) points out that population growth is slowing and that yield gains appear to be meeting those extra consumption needs. The world could still house 9 billion people by 2050, he says, but that won't necessarily mean we experience a production gap in feeding them.

"What I am trying to push back against a bit is the common belief that projected population growth itself creates some unprecedented challenge," Westhoff explained later. "Population growth will probably decline in relative importance as a driver of future demand growth as population growth rates continue to decline around the world. The real difficult questions are how much per-capita consumption will change in the future, and whether productivity growth will continue, speed up or slow down. To oversimplify a bit, if per-capita consumption levels off but productivity continues to grow at the current pace or even faster, then we should expect lower prices in the future; if per-capita consumption grows rapidly with income growth and/or biofuel demand and if productivity growth slows, then we should expect higher prices."

Unfortunately, the most likely scenario at the moment is an oversupply situation. FAPRI is already predicting a large drop in U.S. corn acres in 2014, but overseas production may not drop out as quickly, he said. Or to paraphrase other speakers: What if we threw a party (with full production) and nobody showed?

--Russians (and other low-cost grain producers) are coming, however. The FSU still holds some 74 million acres idled since the 1990s Big Money wants to bring them out of retirement.

Global pension funds and institutional owners have assembled industrial-scale farm operations unimaginable in Iowa: For example, privately held NCH Capital Inc. of New York manages $1.4 billion of ag assets in Russia and Ukraine encompassing over 2 million acres. Cash rents run a mere $50/acre, proximity to railroad sites help them avoid notoriously bad roads and good rain-fed locations scattered across a 2,000 kilometer expanse provide natural crop insurance.

Miracles can happen: Black Sea exports accounted for 11% of world wheat market share in the 1990s, but could hit 35% in 2013/14.

--"You'll miss exports when they're gone," said Gavilon Group senior director Ray Wyse. He contends ethanol demand forced U.S. corn customers to look elsewhere for export supplies. Now global corn markets will be increasingly influenced by competitors outside the U.S. borders, much like South Americans commandeered a big portion of soybean markets and the former Soviet Union now dominates wheat. The new role for the U.S. will be that of the world's "storehouse" and safety valve, not the first market of choice, he predicted.

-- Farm safety nets, meant to trigger when commodity prices plunge below production cost, are on the decline. Neither the House or Senate versions of the farm bill will offer much consolation to producers should corn prices plunge below $4 and other commodities slide along with them, said Joe Outlaw, co-director of Agricultural and Food Policy Center at Texas A&M.

AFPC won't be releasing its analysis of how the farm bill compares to the last farm bill's ACRE program for another 30 days or so, but Outlaw isn't optimistic. Price Loss Coverage (PLC), the optional House Committee target price program which kicks in if marketing year prices average below $3.70/bu., "provides very little protection at price scenarios that have a good chance of occurring over the next several years," a recent University of Illinois study found. The best farm bill alternative--the Senate-approved Agricultural Risk Coverage (ARC), a county-level revenue program--did generate modest corn payments when season-average prices hit $4, but nowhere near the current law's ACRE coverage.

"There's not a lot of safety in the safety net," Outlaw told the Kansas City audience, emphasizing that farm bills should be written for "when things go bad," not the era of prosperity ag has enjoyed since 2006.

For North American farmers, my advice is to proceed with caution.

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