What’s driving agriculture in the year ahead?

C4-MR-2-What's driving 2by Stephen Wagner
Mike Pearson is familiar to viewers of Weekly Journal of Rural America. Speaking on the topic titled above at the 135th Penn-Ag annual meeting, he acknowledges that one of his guiding principles is ‘Trust, But Verify!’
Before you know where you are going in the next marketing year, you have to know where you’ve been, Pearson says. “Obviously, the big issue, the driving force in all ag media in 2012 was the drought. It is still an issue this year. It’s one of those things that carries forward. Thanks to the drought last year we saw tremendous spikes in commodity prices. The drought was a compelling story for non-commercial folks to get into commodities.” Pearson cited the lack of a Farm Bill passing. Instead an extension was signed which means this conversation will be re-visited. Last year, interest rates hit new all-time lows, but farmland values climbed to record or near-record highs. Those four things — drought, farm bill, low interest rates and climbing farm values — “made 2012 stressful for a lot of people,” according to Pearson.
Of those four issues, the most concentrated focus is on drought. Will there be another one? There are so many ifs, ands and buts to this scenario that it could go any which way. It depends on global warming or global cooling, el nino or la nina, and a host of other frost and run-off sidebars playing into the local pictures. It is nearly impossible to predict, although there is a possibility of drenching downpours at harvest time. Very few things have tentacles like drought, one of the primary effects being food inflation. “The experts who predict such things,” notes Pearson, “say it will exceed historical norms and will be reflected in 4 1/2 to 5 percent food inflation. Even stronger, perhaps, for meat and dairy.” But a previously predicted $12 for a box of Corn Flakes isn’t likely.
“We will probably see lower commodity prices than we saw in 2012,” Pearson theorized, “because we are out of the drought in a lot of places. Volatility in the markets for the past five years has been tremendous. That is probably going to continue. The regular trends that we’ve all gotten used to, watching the Chicago Board of Trade, the Chicago Mercantile Exchange; we’ve gotten used to seasonalities, seasonal trends in the markets, being able to anticipate, in a general sense, what’s going to cause the market to turn. This is changing! We’ve got high frequency traders, algorhythmic-based trading formulas, and these things are changing the way markets operate. It is up to all of us to keep an eye on the research that’s coming out so we can manage, survive and thrive in these new market conditions.”
Why have we seen a run on commodity prices for the past 10 years? “Because we found a new demand source for corn,” Pearson explained. “Ethanol has acted as a sponge to soak up bushels. It has created a tremendous amount of new demand that didn’t previously exist.
“I think indications of the U.S. economy are beginning to show signs of real life,” he continued. “We’ve been talking about this since the 2010 ‘Summer of Recovery’ that was preached in the media. Nothing happened. Then there was the 2011 ‘Summer of Recovery’ — this year we’re going to turn things around and it’s going to be a wonderful year. Nothing happened. But then there was the 2012 ‘Summer of Recovery’ — nothing! I think that 2013 will actually see recovery. We will see recovery that started six or eight months ago continue to strengthen. The signs are looking good. Obviously, they can change.”
International growth is another non-ignorable issue. Pearson estimates that the U.S. is going to have to grow as much food in the next 40 years as was grown in the past 500 years. The world population is expected to rise from 7 billion people to 9 billion by 2050. What this means is that every single day when people around the world sit down for dinner, from now until 2050, there are going to be an additional 220,000 mouths to feed. Not only are there more people. More people are becoming wealthy, relative to historical trends. This bodes well for agriculture. Why? Because when people have more money they like to eat better.
“We are seeing strong demand for ag land and that is going to continue. Farmers are paying down debt,” Pearson explained, “getting prepared for that change in the industry when things go back a supply side paradigm. This is a very bullish factor for our industry.”
Finally, there is BRIC. Brazil, Russia, India and China do not form a political union or trade association, yet they are seen to be among the four most dominant economies by the year 2050. These four countries comprise one quarter of the earth’s land mass as well as 40 percent of the global population. China and India are likely to become dominant in the supply of manufactured goods while Brazil and Russia are expected to be leaders in raw materials markets. That is statistical promise. What is fact and not mere statistics is that BRIC, as of March 2011, has more billionaires than Europe for the first time, according to Forbes magazine. In the next 12 years what makes up the middle classes of all four countries could reach 200 million. India alone has 10 of the world’s 30 fastest growing urban centers, and 700 million people are expected to move to cities by 2050. Meanwhile Africa also continues to emerge with more banks competing for market share. Latin America is strengthening its economic ties with the Dark Continent. As farm bill discussions resume, urban perceptions of rural America will play a key part. Agriculture continues to be one of the bright spots in the economy.

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