Farming’s best days may soon be behind it, the American Farm Bureau Federation’s top economist said Monday.
Speaking to farmers gathered in Billings for the Montana Farm Bureau Federation’s annual meeting, economist Bob Young said market growth for U.S. agriculture has been unprecedented, with farm income value rising from $275 billion in 2003 to $425 billion the last three years. Conditions are now right for that growth to decline, with corn demand waning and China’s appetite for U.S. export crops like soybeans tapering off.
“We’ve gone from something in the neighborhood of $275 billion to $425 billion since 2003. That is a hell of a story,” Young said. “You’d almost have to view that as ‘This is the best of times.’ I’d also tell you that whatever goes up like that, sooner or later, more than likely, one has to expect, one has to think about getting ready for it to go the other way.”
American demand for corn for fuel has been a significant driver, starting early last decade when ethanol replaced the additive MTBE as an octane booster in gasoline. MTBE, or methyl tertiary butyl ether, was phased out by the federal government after it was ruled a human health threat.
Demand for ethanol as an octane booster drove up the demand and the price for corn, which received another boost when Congress passed a renewable fuel standard that launched in 2006. Rising corn demand was the tide that raised demand, and prices, for grains like barley and wheat, which became affordable alternatives to corn as animal feeds.
But corn-for-fuel demand is softening because the demand for gasoline, into which ethanol was to be blended, has also softened. The federal government expected U.S. ethanol consumption to reach 15 billion gallons by 2015, based on an expected gasoline consumption of 150 billion gallons.
Gasoline consumption hasn’t increased, Young said. Rather, gasoline consumption has fallen to 135 billion gallons and appears headed to 130 billion gallons.
In 2003, 2004 and forward to 2010, "you can see the corn behind that production line just driving demand. Every year we needed another 400, 500 million bushels of corn pushed through the system to generate that ethanol,” Young said. “We missed that peak, we’ve plateaued and a guy could tell a story that we’ve come down a little bit.”
Corn demand is still there, Young said, but demand growth has stopped, which means the price isn’t going to stay high.
The other big ag slowdown on the horizon is China’s demand for soybeans, which increased 40 billion metric tons in the last decade. Growth for the next 10 years is half as much, meaning the momentum previously driving prices is slowing, Young said.
Finally, interest rates are more than likely to rise from current historic low levels, which will more than likely drive down land prices. In Illinois, for example, a 1 percent rise in interest rates causes land values to fall about $1,200 an acre, Young said.
“Recognize how important that land base is to our asset base for agriculture as a whole and what happens to that asset base if we start talking about interest rates instead of being 2.5 percent or 3.5 percent being 5 or 6 percent,” Young said.
Working in farmers’ favor, Young said, are historically low debt ratios. Farms as a whole are in the best financial shape they have ever been in. Looking ahead, the farmers who don’t borrow heavily are most likely to weather whatever comes next.