February 2010
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Ag Economist Sees More Global Interdependency

Dr. Terry Barr Predicts Slow Recovery with Sector Volatility

The good news is that evidence is pointing to a turn-around in the economy. The troubling aspects are: the recovery won’t be quick, and volatile conditions will prevail in many sectors, including agriculture. In addition, the emerging economy will likely bring with it a host of other changes.

That’s the way Dr. Terry Barr, an agricultural economist, views the road ahead.

In a recent talk at a meeting of agribusiness leaders, Barr noted the world is on the brink of a major structural change in global markets for food, services and capital. And those markets will be shaped by shifting economic and regulatory policies, as well as by economic conditions in countries other than the United States.

The end result will be a transition to more sustainable growth, a trend that will rebalance global and economic interdependency, Barr said. Complicating and slowing that change are the condition of financial markets of advanced economies, where the current downturn began and the fact of a resource-challenged world still lies ahead.

The impact potential changes in numerous policies will have on the private sector’s decision-making is another factor in the complex economic equation. New policies being considered in this nation provide a case in point. Among the certain or probable areas of change are:

• Regulation of financial markets;

• Immigration;

• Energy, where climate change issues and a transition from fossil fuels could have a major impact;

• Health care;

• Governmental oversight affecting clean air, and water and food safety; and

• Deficit reduction, a battleground that will affect tax policies and various entitlement programs including Social Security, and farm and food programs.

With virtually every aspect of the economy touched by possible policy shifts in these areas, risk management and long-term investment strategies are bound to be affected as well, Barr predicts.

U.S. consumers took on a huge amount of debt before the recession and now are cutting back. As a result, consumer spending – a major part of the domestic economy – no longer can support all the business expansion taking place before the bubble burst. And while job losses recently have slowed, the consumer remains uneasy about high unemployment, which likely will peak at 10.5–11 percent this year, Barr said.

Not surprisingly, the level at which the nation’s industrial capacity is being used now is low and likely will not recover quickly. Money is available for expansion, but virtually all borrowers – businesses (including farmers) and consumers — are unwilling to take on debt at levels they were comfortable with earlier. Another reason is, while interest rates are comparatively low, lending qualifications and loan covenants are tougher.

Until businesses become more optimistic and start to invest more, unemployment will remain stubbornly high.

Barr is senior director in charge of economic research at CoBank, an agribusiness lender that is part of the federal Farm Credit System. He earlier worked with the National Council of Farmer Cooperatives, an agricultural trade association of which Alabama Farmers Cooperative is a member, and the U.S. Department of Agriculture.

During his talk, Barr made a number of other observations and predictions including:

• The Chinese economy has enjoyed rapid growth in recent years, primarily due to increases in its exports. In the emerging economy, China will need to rely more on its own consumers for economic growth due to cutbacks in consumer and business spending in the U.S. and other markets.

• The level of global economic recovery will set the pace of any rebound in oil prices. Situations in important oil-producing areas like the Middle East, Nigeria and Venezuela will keep uncertainties in the market.

• Potentially larger supplies of natural gas mean prices of that commodity are likely to hold steady.

• Falling home prices and a slumping stock market have been key factors in the decline of consumers’ net worth during the current recession. Home prices recently have started to show some slow improvement but remain 29 percent below their peak in 2006.

• The Federal Reserve will continue to promote growth well into 2010. Any significant increase in inflation and interest rates isn’t likely until the jobs situation shows strong improvement, a situation not expected until 2012.

The outlook for agriculture: a mixed bag, much volatility

U.S. agriculture will not be exempt from all the uncertainties and difficulties the emerging global economy will bring, and each commodity will face differing circumstances and challenges.

During a recent presentation before an audience of agribusiness leaders, Barr took a detailed look at what’s ahead for the food and fiber sector.

A key question in this mix is whether gains in technology will outpace the recovery in overall demand for agricultural products.

The prediction that China and India will account for 70 percent of the growth in the middle class between now and 2030 could be good news for American agricultural exports because higher incomes invariably are accompanied by a demand and ability to pay for a better diet. But any growth in exports won’t be a straight-line path and considerable volatility will prevail, Barr believes.

Here’s a summary of what he expects in various sectors of the ag economy:

• Grain – World supplies are rebounding as demand weakens and crop conditions improve. Wheat leads the way because it can be grown in so many places, although declining U.S. acreage has slowed the buildup of supplies here. Demand for corn for ethanol production continues to support grain markets in general. Production increases in South America will affect the market tone this year and perhaps longer. With expected production increases in 2010, U.S. soybean stocks also could increase quickly.

• Cotton – Sharp increases in yields since 2003 have boosted non-U.S. production by more than 25 percent, a factor limiting the market for domestic output. Current U.S. production is at its lowest level in 20 years and harvested acreage is at a 25-year low point.

• Livestock, dairy and poultry – The meat industry will be cautious about expanding this year. The hog sector has been under pressure for more than two years and poultry now is struggling to hold onto a positive turn in late 2008 and early 2009. Although milk-feed ratios have made a small recent turn-around, dairy producers will continue to be affected by market volatility. Meat and dairy will need to increase exports in order to grow. Exports now account for 14 percent of all U.S. meat production, ranging from a high of 20 percent of pork output to seven percent of beef.

• Inputs – Prices of feed, nitrogen, potash and phosphate are set globally and likely will remain highly volatile.

Overall, while farm net cash income fell in 2009, the farm debt-to-asset ratio remains at a manageable level and the ag sector’s balance sheet was solid entering 2010.