Geopolitics, Food Trends to Create Market Opportunities for U.S. Ag

We recently invited leaders in farming, ranching and agribusiness to step back from the day-to-day work of agriculture to talk about what the future holds for U.S. producers. Experts in protein, consumer trends and geopolitics outlined the challenges agriculture will face – at home and across the globe – in the next five to 10 years. All agreed that U.S. agriculture is in an enviable position to capitalize on its strengths to expand its market presence.

“We are moving from a world in which the U.S. is the largest capital provider and the largest consumer base to one in which the U.S. is the only capital provider and the only consumer base. And that is only 15 years away,” said Peter Zeihan, a geopolitical strategist, forecaster and author of “The Accidental Super Power.”

Brett Stuart, an economist and CEO of Global AgriTrends, observed that “the opportunities have never been better.”

Following are some of the thought-provoking views shared by the guest presenters at our 2015 Agribusiness Finance Executive Summit in Omaha as they analyzed trends shaping the future of U.S. agriculture:

  • Demand for agriculture products in the next 15 years will be driven by the world’s growing middle class, projected to increase to 5 billion by 2030. This growth will be concentrated in urban areas, where people use their wealth to buy better and more food, particularly in the area of protein, Stuart said. Sector-specific projections:

    Poultry
    will overtake pork as the world’s No. 1 source of protein by 2020. Poultry consumption is being driven by population gains in southeast Asia and Africa.

    Aquaculture
    surpassed beef for the first time last year in world consumption. Tilapia produced in China dominates this market. Aquaculture will continue to thrive, competing with other protein sectors for feed.Beef production hasn’t increased in seven years, even as the world added 550 million people and GDP rose by $14 trillion. The resulting record-high prices are projected to peak in 2015 before returning over the next five years to pre-boom years – about $1.70 per pound by 2020.
  • As countries struggle to meet demand, more will choose to import cheaper, more efficiently produced food. Half of Japan’s calories come from imported food compared to 1.5 percent in China. It will take time, but eventually China’s self-sufficiency experiment will fail, Stuart said, and the market will open to outside food producers.
  • Southeast Asia and Mexico will be growth markets for U.S. ag producers, Zeihan said. Southeast Asia has a young population that is urbanizing at three to four times the rate of rest of the world. With little to no food production of its own, the region is filled with hungry people friendly to the U.S.Mexico will be the world’s fastest growing economy for the next 50 years. Only Afghanistan has worse topography, meaning Mexico has no choice but to import food to feed its people.
  • Europe’s anti-GMO policies will erode, giving way to a market open to both GMO and GMO-free products, Stuart said. Already, Europe is loosening some anti-GMO laws to ensure its protein producers have access to feed.
  • Aging populations and other market factors will cut into Canada’s and Brazil’s global competitiveness, leaving U.S. ag to dominate trade, according to Zeihan. U.S. producers, however, would be wise to keep an eye on Argentina. With the right government policies, Argentina could use its labor pool and waterways to become a market force.

View the full presentation by Brett Stuart, CEO of GlobalTrends:

View the full presentation by Peter Zeihan, author of “The Accidental Super Power”:

Control Family Expenses to Protect Farm Profits

It’s not what you earn, it’s what you spend. For farm families whose living expenses crept up during the recent run of strong commodity prices, Dr. David Kohl’s words serve as a call to action.

Dr. Kohl repeated the phrase throughout this year’s Side By Side Conference, our annual three-day event for young and beginning producers. Left unchecked, Dr. Kohl cautioned, family living expenses threaten the profitability of farm operations. Top managers are adjusting family living and other costs to ensure they aren’t on the wrong side of agriculture’s widening gap in profitability.

Below are key strategies that Dr. Kohl recommended for taking control of family living expenses:

  • Follow the 60-30-10 rule: Sixty percent of farm profits are invested in improved efficiency; 30 percent goes to a working capital reserve to build liquidity; 10 percent is earmarked for discretionary spending, or family living. Families desiring a higher standard of living might need non-farm income to supplement their withdrawals, he says. But he has advised withdrawing less if families are operating their farms with a debt-to-asset ratio (total farm liabilities divided by total farm assets multiplied by 100) of more than 50 percent.
  • Separate business and personal expenses. Dr. Kohl advises developing a family budget that breaks down costs on a monthly basis. Set aside the budgeted amount, plus 25 percent for unexpected costs.Then stick to the budget.

Our financial officers work with customers to better track living expenses so families are in a better position to set spending goals that are right for them. Contact your local FCSAmerica financial officer if you’d like help assessing how family living expenses affect your farm operation.

2014 Family Living Planner

How to Decide Right Time for Farmland Purchase

While sales activity continued to slow in the first quarter of 2015, farmland remains in fairly solid demand. Interest rates still are attractive and land in many areas across the corn belt is generally cheaper than a year ago, when prices in several areas hit all-time highs.  Some who are bullish on agriculture long-term consider this a good time to expand their operations for a future in which they foresee more consolidation and greater efficiencies in the industry.

For those weighing a land purchase, the decision starts with a realistic cash flow. Whether times are good or bad, cash flow is key to determining if you can afford to buy farmland. In today’s environment of lower commodity prices, potential buyers need to ask: How much room do I have to take on land that is unlikely to cash flow in the current grain cycle? At today’s grain and input prices, borrowers likely will need the rest of their operation to subsidize the land purchase.

The balance sheet is the next factor. Producers who plan to put cash into a land purchase – and many of today’s buyers are doing just that – need to take a hard look at what this does to working capital. Does the remaining working capital provide enough cushion if cash-flow problems develop?

Finally, potential buyers will want to consider their balance sheet equity. A producer might have low enough costs to make land bought at today’s prices cash flow. But if cash flow is tight and working capital is weak, the risk could prove too great. Ask yourself: If I leverage up my balance sheet and I have a bad year, will I still be able to get financing to keep my operation going? Will I be able to invest in a new tractor if my current one breaks down?

Signup is Open for the Dairy Margin Protection Program

The open enrollment period for the 2016 Dairy Margin Protection Program (MPP) through FSA opened July 1 and will run through Sept. 30.

Acceptance of the MPP has been good. “More than half the nation’s dairy producers enrolled in 2015,” according to Krysta Harden, USDA deputy secretary, who notes the participation exceeded expectations for the first year of the program. Some were constrained by having already purchased Livestock Gross Margin (LGM) protection through the RMA: MPP would kick in only after a producer’s LGM coverage expired. As a group, the producers who enrolled in MPP covered 85.4% of their production history.

The MPP makes a payment when the margin between milk price and feed costs during one of the defined two-month periods (January/February, March/April, etc.)  is less than the margin coverage chosen by the producer. You can continue with the catastrophic $4 level at 90% of your production history or pay a premium to buy up price coverage on 25% to 90% of your production history in 5% increments, but you are allowed only one election on your entire production base.

A bit more than half (58.4%) of producers who enrolled in 2015 stayed with the catastrophic coverage of $4/cwt. margin based on milk price minus feed costs, applied to 90% of production history. That coverage is free to producers who sign up and pay the $100/year administrative fee, which applies to all participants. The next most popular coverage was $6.50, with 26% paying the 9¢/cwt. premium for that coverage, followed by $6 at 15.5% and $7.50, at 5.8% of producers.

As a measure of likelihood of payoff, between 2006 and 2013, the percent of time that margins would have fallen below various price thresholds, according to Joe Horner, Extension economist at the University of Missouri, was:

Margin

$4

$4.50

$5

$5.50

$6

$6.50

$7

$7.50

$8

Payoffs

13%

13%

15%

15%

23%

25%

33%

38%

50%

Tier 1 premium / cwt.

0

2.5¢

5.5¢

21.7¢

30¢

47.5¢

Tier 2

0

10¢

15.5¢

29¢

83¢

$1.06

$1.36

The cost to boost coverage above the free $4 catastrophic protection is shown in the bottom row of the table. Tier 1 premiums apply to annual marketings below 4 million lb. Tier 2 premiums for production above 4 million lb. are twice as much or more expensive. Notice the large jump in premium increases at the $7 level for both Tiers. Most producers milking more than 3,000 cows and financed through Farm Credit Services of America’s Agribusiness Finance team have signed up for the catastrophic coverage and many have bought up to $6.50/cwt. over coverage. Above that price threshold, it is difficult to justify the increase in coverage cost.

For instance, even though there’s a 50% chance of payoff at an $8 margin, the stiff premium reduces the likelihood a producer will choose to buy up to that level on a large percentage of production. For example, based on the January/February margins, FSA made payments to 261 producers and some checks were for only $17, according to Kent Politsch at RMA. “March/April had the same results. Thankfully the market price has meant that lower coverage levels haven’t kicked in so far this year.”  In most states, average percent of production history covered was 80% to the maximum of 90%.

Note that each two-month payment is annualized, with the potential for six payments per year. As an example, suppose your production base is 3 million lb. (30,000 cwt.) and you choose 50 percent coverage at a margin of $7. Suppose FSA’s calculated margin is $5, a $2 difference. The payment would be $2 x 50% = $1 x 5,000 (30,000 / 6 – annualizing the two-month period) = $5,000.

Program Basics

To be eligible for MPP-Dairy, the operation must:

  • produce and commercially market milk from cows located in the United States;
  • provide proof of milk production at the time of registration (your production history is the highest level of annual production during 2011, 2012 or 2013; if you enrolled in 2015, it will increase 2.6% in 2016 under the rule that it is adjusted by any increase in the amount of milk marketed nationally
  • not be enrolled in the Livestock Gross Margin – Dairy program through RMA
  • meet conservation compliance provisions
  • agree by all involved producers to the coverage elected on the contract

Enrollment requires submitting form CCC-781 to establish production history and form CCC-782 to elect annual coverage. An administrative fee of $100 is charged to enroll. If you “buy up,” you need to pay at least 25% of the premium for the coverage you choose by Feb. 1 and the balance before June 1. This is calculated by multiplying your historical production by the percent coverage you select by the premium for the margin level you select. For example, if your production history is 3 million lb. (30,000 cwt.) and you select 50 percent coverage at $7, your premium would be $3,255 (50% = 15,000 x .217).

Producers, who enroll for 2016, are opting in for the life of the farm bill (through 2018), notes Politsch. “But they will re-elect their coverage during the enrollment period each year.” Failure to elect results in a default coverage at the CAT level.

Additionally, enrolling in MPP precludes enrolling in RMA’s LGM program.

Adjusted gross income restrictions in the 2014 farm bill don’t apply to this program.

For details about the program, including how the margins are calculated; 2015 enrollment results; and a link to the USDA’s signup decision tool.

Click to visit a calculator on the FSA website to determine costs at various production levels.

Help Us Find 100 Fresh Perspectives

It takes vision to succeed in agriculture, to evolve and thrive in an industry that faces new challenges every season. We invite you to help us identify 100 leaders whose vision is changing the future of rural communities and agriculture for the better.

This national search, known as Farm Credit 100 Fresh Perspectives, is part of Farm Credit’s centennial celebration as we begin our 100th year of service. Fresh Perspectives pays tribute to agriculture’s past leaders by identifying those men and women whose current work builds on a legacy of innovation and creativity.

Farm Credit will honor 100 leaders from a variety of backgrounds: farmers and ranchers, as well as individuals who represent other agribusinesses, cooperatives, academic institutions, government agencies, and community and non-government organizations. Nominations can be submitted online now through December 18, 2015.

Nomination categories include:

  • Leadership (over 21)
  • Youth Leadership (21 and younger)
  • Rural Policy Influence
  • Beginning Farmer or Rancher Achievement
  • Entrepreneurship and Innovation
  • Sustainability and Natural Resource Conservation
  • Financial Stewardship
  • Mentoring and Volunteerism
  • Agriculture Education and Community Impact
  • Rural and Urban Connection

A panel of experts on rural matters, including Farm Credit leaders and representatives from around the agriculture industry, will evaluate and select the top 100 honorees. The final 100 names will be announced in early 2016.

Farm Credit 100 Fresh Perspectives honorees will have the opportunity to share their stories through a variety of promotional opportunities Additionally, 10 distinguished honorees – one from each category – will be awarded $10,000 to help further their work in creating a strong and vibrant future for agriculture and rural America.