WASHINGTON, Mar. 1, 2017 - Trade worries, low commodity prices and shifting consumer preferences are all contributing to an uncertain economic picture for farmers, industry representatives told a full house at the opening session of USDA’s Agricultural Outlook Forum (AOF) last week.
Beth Ford, Land O'Lakes
Some of those concerns were generated by President Donald Trump, who took the U.S. out of the 12-nation Trans-Pacific Partnership as one of his first actions in office, saying that the country would be better off negotiating agreements with individual countries. Trump has also vowed to renegotiate the North American Free Trade Agreement.
“Those (one-on-one negotiations) need to happen with speed,” Beth Ford, chief operating officer for Land O’Lakes, said in a panel discussion moderated by Agri-Pulse Editor Sara Wyant.
“I think the administration and President Trump understand the importance of trade,” Ford said. However, she emphasized how challenging the unsettled trade environment is for businesses trying to conduct long-term planning. In particular, she said the administration should focus on addressing the country’s relationships with the “key markets” of Mexico and China.
Another panel member, Luke Chandler, deputy chief economist at Deere & Company, said that “U.S. agriculture probably has the most to lose of any sector when it comes to trade.” Deere, like the ag sector as a whole, was squarely behind passage of the TPP, which he said “would have really equaled the playing field” for U.S. beef.
The trade concerns are occurring while farmers are facing “an extended period of low returns,” Rajiv Singh, the head of Rabobank’s wholesale division, told the AOF audience in his presentation, which he labeled “the good, the bad, and maybe the better.”
Singh said Rabobank was predicting that commodity prices are likely to stabilize, but most farmers can still expect the price of corn to remain below $4/bushel over the next five years. From 2001 to 2011, grain prices increased steadily, cresting at about $7/bu in 2013. Since then, however, they have plummeted; the current price of corn is about $3.70/bu, and Rabobank predicts that it will drop to $3.07/bu in this crop year.
The bank sees the top quarter of producers getting slightly more than $4 a bushel while the bottom quarter would receive “in the $3.20 range” over the five-year period. “We are looking at things . . . improving slightly,” Singh said. “We are not looking in any fashion at returning to the good old days from the early part of this century.”
“Our prediction is that this will be more like 1992-96 or the 1986-88 ag expansions,” which saw 30-40 percent price increases, he said.
Singh said that the downturn in the commodity markets has forced farmers to cut costs by reducing equipment purchases, cutting back or minimizing fertilizer applications, and switching to cheaper seed. The economic picture has helped drive the four proposed mergers now in the works – Dow-DuPont, Bayer-Monsanto, ChemChina-Syngenta, and Agrium-PCS, he said.
Rabobank's Rajiv Singh
While the mergers will benefit growers, who will see “new products and services … at price points that are attractive,” other segments of the farm economy will be negatively affected, he said.
“Retailers, wholesalers and cooperatives will experience even greater margin pressure as input manufacturers renegotiate selling commissions and concessions,” according to the presentation accompanying Singh’s talk.
The consumer landscape has changed considerably in recent years,
Luke Chandler, John Deere
Singh said. Gone are the days of the past when “big corporations” held outsized influence over consumer preferences.
“I think people are tired of Kellogg and Kraft telling them what breakfast should be,” he said. “They want to try it out on their own.” The trend is shifting towards products outside the mainstream – almond milk instead of low-fat milk, for instance.
In a nod to Land O’Lakes’ Ford, however, he noted that “the one rare category that hasn’t moved away from big brands is butter.” Nevertheless, what used to be considered fads should now be called trends, he said.
“Gluten-free has led to a 10 percent decline in wheat consumption in the U.S.,” he said. “It’s not a fad anymore.” Other examples of products that are “substantial, viable categories on their own” are blue corn and quinoa, he said.
Singh and Ford stressed the need for innovation in the food sector in order to address consumer preferences. “What worked in the past may not work anymore,” Singh said.
Ford noted the steady decline in fluid milk sales, which she said is having a “significant impact” on dairy profitability. “We have an innovation problem,” she said. “We have a challenge to make it attractive to consumers.” Her R&D team is “working aggressively” to come up with new products, Ford said.
Deere’s Chandler said his company experienced its third straight year of declining sales in 2016 – only the third time that’s happened in Deere’s 180-year history. Since peaking in 2013, sales are down about 60 percent, he said.
U.S. farmers are facing more competition from growers in other countries, such as Brazil, now the world’s largest soybean exporter, and Russia, now the biggest wheat exporter.
Despite record worldwide production, however, Chandler said he does not believe there is a global supply glut of grains, because China is holding the equivalent of half of the world’s grain stocks, and “it’s highly unlikely those stocks will ever come onto the world market.”
“This leaves the market more sensitive to a weather-induced setback than what the headline numbers might otherwise suggest,” he said.
Looking ahead, all three speakers were optimistic about the future of agriculture. Ford said farmers are “authentic and trusted” and that the United States is “the best producer and the most efficient producer.”
Singh said there is considerable upside in the ag sector, but companies will have to evolve and innovate in order to adapt to a changing marketplace. One potential area for growth is bioengineering, he said, noting that “for the first time, gene editing costs have come down substantially.”
Consumer acceptance of GE products could grow if companies are able to develop popular products, he said. “This whole distrust of science can be addressed,” Singh said. “We have a unique opportunity for the sector to make use of this.”
Chandler said that despite “short-term headwinds,” the long-term outlook for agriculture remains strong. He pointed to an increasing world population – projected by the United Nations to reach 9.7 billion by 2050, from about 7.4 billion now – and increasing affluence in markets such as Southeast Asia. In China, for example, per capita meat consumption is five times what it was in 1980.
Urbanization also is increasing, he said. By 2050, nearly 70 percent of the world’s population will live in urban areas, which supports trends towards mechanization and precision agriculture.
“The long-run tailwinds are still very strong,” he said.
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