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USDA predicts good economic and financial conditions for U.S. agriculture

Sunday, December 9, 2012

The December 2012 Amber Waves electronic magazine is now available online. It can be found at http://www.ers.usda.gov/amber-waves.aspx. The Economic Research Service (ERS) is the main source of economic information and research from the U.S. Department of Agriculture. Located in Washington, DC, with approximately 350 employees, the mission of ERS is to inform and enhance public and private decisionmaking on economic and policy issues related to agriculture, food, natural resources, and rural development. To accomplish this mission, highly trained economists and social scientists develop and distribute a broad range of economic and other social science information and analysis.

One of the feature articles is entitled, "Economic and Financial Conditions Bode Well for U.S. Agriculture" which is written by Matthew Shane and Mitch Morehart. This article stresses the importance of U.S. agriculture due to increased demand. This demand is due to the strong demand from developing countries, the falling dollar, and the increased growth in biofuels. These factors lead to strong prices and strong demand prior to the 2008-09 recession. U.S. agriculture has relatively strong balance sheets and low overall use of debt so it is poised for future growth. Because of strong demand for agricultural commodities and products, real U.S. farm income has been robust since 2004.

I attended the 2012 Regional Corn Meeting at the Miner Convention Center on Thursday and I was impressed with the potential for the corn, wheat, and soybean markets for this next year. Even with lower prices for these commodities, there are opportunities for marketing. Part of the reason for the optimism is the increase demand from China. China is one of the world?s largest producers of agricultural commodities. However, most of what China produces is used for their own people, so they must import enough of the grains to feed their population. At the recent Certified Crop Advisor Training at the Delta Center, we learned that China is importing rice. This information was presented by Greg Yielding who is a field representative for the U.S. Rice Producers Association. He indicated that U.S rice has been consumer tasted at several supermarket chains. The Chinese consumers not only like the taste but they are concerned with food safety issues. They are willing to pay a higher price due to their perception of U.S. rice quality.

Several additional reasons that the agriculture sector is so strong are because of the gains in farm prices have led to an increase in farmland values. Inexpensive and accessible farm credit lowered the cost for producers and also increased farmland values. As a result, farm financial assets grew by 31 percent and farm equity by 32 percent between 2004 and 2012. With the stability of the farm credit situation, this trend should continue over the next several years.

Farmers are cautious with credit since the last major farm crisis of the 1980?s. A farm crisis is a term describing times of agricultural recession, low crop prices and low farm incomes that can lead to farm bankruptcy, family break-ups, and increased rate of farmer suicides. Many producers who survived this crisis became more cautious with their use of farm credit.

Agriculture has benefited from the health of its two primary lenders: rural commercial banks and the Farm Credit System. These two institutions held over 85 percent of farm debt in 2010. This institutional stability has enhanced the farm sector's ability to obtain credit and favorable interest rates.

In the 1990's, much of the U.S. grain crops were used for domestic consumption. However, as farm policy has changed, more of the agricultural sector production is driven by the export markets. Two basic factors underlie the increase in the rate of export growth. First, U.S. agricultural export growth is increasingly dependent on developing countries and benefited from their relatively strong economic performance during 2008-11. The developing-country share of U.S. agricultural exports rose to more than 60 percent in 2011, up from 40 percent in 1998. Differences in economic growth rates between developed and developing countries have been increasing for some time, and the 2008-09 recession reinforced this pattern. While economic recovery lags in developed countries like the United States, the European Union, and Japan, developing countries have generally been able to sustain or resume relatively high rates of growth. Although near-term growth has slowed in China, India, and some other developing countries as they try to contain inflationary pressures, overall prospects are for relatively high sustained growth in developing-country markets.

The second factor in the growth of U.S. agricultural exports is the depreciation of the U.S. trade-weighted dollar between 2002 and 2012. With the weaker dollar, it is cheaper for developing countries to buy our commodities. This trend has continued since 2002.

While there is a lag in recovery from the global recession in the European Union, Japan, and the U.S., the developing countries in Asia, Latin America, and Africa are leading the way.

The U.S. agricultural sector weathered the recession better than most industries. We have the capacity to produce commodities that are in demand. We are competitive because our higher yields, low interest rates, and favorable exchange rates. Our agricultural sector is poised to remain strong in world markets for the foreseeable future.

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