The Rising Influence of Rising Affluence

[DewDiligence]

Boom Times Continue for US Farming

http://www.ft.com/intl/cms/s/0/8c6a37f0-1b33-11e1-8b11-00144feabdc0.html

›November 30, 2011 10:03 am
By Javier Blas

What makes North Dakota, Nebraska and South Dakota different from the rest of the US?

The first difference is that they have the lowest unemployment rate: 3.5, 4.2 and 4.5 per cent, respectively, compared with a national average of 9 per cent in October.

The second big difference is farming. Agriculture has the largest share of gross domestic product in the three states. While the national average is less than 1.5 per cent, it is 10.9 per cent in North Dakota, 9.4 per cent in South Dakota and 6.8 per cent in Nebraska.

A large agricultural sector was a curse in the 1980s and 1990s, but today, it is a blessing.

The US Department of Agriculture said on Tuesday that the net value added of agriculture to the US economy – adjusted by inflation – will be the highest this year since at least 1974. And the boom is likely to continue. Official figures, also released on Tuesday, show that in 2011, US farmers will take home for the first time more than $100bn in a single year. As Tom Vilsack, the agriculture secretary puts it, “agriculture continues to be a bright spot” in the US economy. Indeed, farming, together with natural resources production, particularly oil, is one of the few bright spots.

The agricultural boom has been a windfall to the US agribusiness sector, moving it for the first time in years into the mainstream consciousness of investors. Companies from Deere & Co, the world’s leading manufacturer of tractors and combine harvesters, to Monsanto, the seed and pesticides producer, to Cargill, the world’s top agricultural commodities trader, have benefited. At the same time, the price of farmland in agricultural states – now another popular investment – has surged, with year-on-year gains topping 25 per cent.

The USDA suggests that the country’s farm sector is heading to another good year in 2012, extending the boom for a fifth consecutive year. Over the past decade, net farm income has almost doubled as the US has expanded its production of food commodities – particularly corn – and prices have surged to historic highs. In 2001, the country’s farmers took home more than $50bn; this year, the USDA estimates they will earn $100.9bn, up 28 per cent from 2010. At the same time, government handouts paid directly to producers are set to drop to $10.6bn this year, down 1.4 per cent from 2010.

The surge in farm income is the result of a rare boom in agricultural commodities. Over the past 30 years, food prices have increased only briefly in a few occasions. Most of the time the spikes were isolated to single commodities – wheat, corn or soyabean. The current boom, however, is lifting the price of almost every agricultural commodity at the same time, a phenomenon last seen in 1973-74.

The boom has its roots in strong demand for agricultural commodities in developing countries, particularly China and India, the voracious appetite of the US biofuel industry, and supply and trade disruptions in key producers, from Russia to Australia.

There are some clouds on the horizon, however.

There has been a sharp increase in costs, with fertilisers up 28 per cent year-on-year and fuel up 27 per cent year-on-year. All in all, production expenses will rise 12 per cent to a record $320bn. The 2011 jump resembles the worrying increase in expenses witnessed in 2007 and 2008.

Also, the boom could be coming to a natural end. The multi-year run of high prices is an oddity. Historically, production of food commodities eventually outruns demand triggering a protracted period of low prices. Whether the continuing strong demand will curb the natural tendency of farmers to overproduce themselves out of prosperity remains to be seen. But in the meantime, North Dakota, Nebraska and South Dakota will continue to remain different.‹