Dr. Dave Kohl’s (Academic Hall of Famer in the College of Agriculture at Virginia Tech) presentation for the Federal Agricultural Mortgage Corp. highlighted how domestic farmers are faced with slowing growth (driven by prospects for less export demand) & a continuation of elevated costs as the U.S. becomes a secondary supplier in the world. 2024 could be very volatile…
Farming Market Trends
- 20% of domestic net farm income is driven by exports to a slowing global economy. For instance, 20% to 22% of U.S. milk production is exported to China which represents a soft market.
- The U.S. is becoming a secondary supplier in the world as China & many other Asia countries seek to buy first from the Southern Hemisphere (South America, Australia & New Zealand). This will prompt an integration of Canada, U.S. & Mexico into a global economic block.
- Brazil is putting agricultural land production in new production which is equal to half of the size of the state of Illinois (with more supply on the way during the next 10 – 15 years), adding to the U.S.’ position as a secondary supplier particularly as it relates to beans, corn & proteins.
- Notably, China’s silk & Belt Road initiative, which started in 2013, represents a $1.3 trillion investment in ~70 countries around the world, including Brazil, providing a substantial source of food, fiber & fuel for the Asia region.
Farm Profit Outlook
- Ag prices are declining while production costs remain elevated, leaving domestic farmers with razor-thin margins.
- Higher oil, diesel & natural gas fuel prices would be much higher if not for China’s economic slowdown given that China consumes 10% to 15% of the world’s oil supply. Energy prices also benefit from increasing domestic production.
- Lower profit farms are not expected to go out of business because of elevated land prices which provides them with options to refinance & restructure.
- However, Dr. Kohl expects a widening gap in farm profitability from 2024 to 2030 with the most efficient farm operators consolidating the domestic market.
- As a healthy protein market helps drive a healthy crop industry (feed), it is very important to keep an eye on protein price prospects.
2024 Farm Volatility
- As 50% of the world population is going to go through a major election this year (including the authoritarian economies of Mexico, India & Russia), there is a sizeable risk from the potential of changing global trade policies that may cause volatility in the ag markets.
- With $350 trillion in global debt compounded by high interest rates, global economic growth is at risk for a gray rhino event (while a black swan event comes out of nowhere, a gray rhino event is right in front of us & easy to see).