April 4, 2017

DrKohl_color The Ag Globe Trotter

Dr. Dave M. Kohl

Welcome to the weekly edition of The Ag Globe Trotter by Dr. Dave Kohl.

Today, the economics of agriculture, as well as the general economy, stand at a crossroad with uncertainty in each direction. Further, the propensity and magnitude of change in agriculture and rural sectors add to the unknown. As we attempt to plan around those unknown elements, it is useful to identify the most likely sources of disruption and change.

Always important, trade has emerged as a forefront issue since the beginning of the new administration. Potential action on trade agreements such as NAFTA is concerning, but global relations, in general, also greatly impact the exchange of goods and services. American agriculture is projected to generate $124 billion in agricultural exports this year, amounting to approximately 20 percent of U.S. farm income. This ranges from cattle to pork to milk to fruits to nuts, and particularly in the Northwest, hay and timber. Commodities such as tree nuts, rice, soybeans and wheat make up anywhere from 50 to 70 percent of products exported. Because of these exports, U.S. agriculture has nearly a $20-billion trade surplus.

If the new administration moves toward a protectionist stance such as repealing trade agreements, serious consequences will likely ripple through agriculture and rural America. For example, of the top U.S. export destinations, seven are in Asia: China, Japan, South Korea, Hong Kong, Taiwan, the Philippines and Vietnam. Combined, the export value to these areas is approximately $50 billion. Moving to Canada and Mexico, these countries represent nearly $40 billion in export trade. For the U.S. dairy industry, one out of every seven days of U.S. milk production is exported. Of this, 39 percent is sold in Mexico, and in recent years up to 20 percent in China. Dairy exports account for 30,000 American jobs. Each agricultural sector has comparable numbers.

China purchased over $20 billion of agricultural exports last year, which is an increase of 200 percent since 2006. This amount is nearly 20 percent of all U.S. agricultural exports. If tariffs are imposed on China, agriculture will be among the first to feel the ill effects.

Of course, American agriculture is no stranger to fallout from policy disputes and strained foreign relations. When the U.S. closed the border to trucks from Mexico, the American fruit and vegetable industries lost market share and income. Because of the West Coast port dispute, many producers lost not only income, but long-term trust with an Asian market that values reliability. Of course, the historical examples of agricultural ramifications from political events around the globe are too numerous to list.

Projected net farm income for American farms is in the $70 billion to $75 billion range, down significantly from levels during the commodity super cycle. Providing 20 percent of net farm income, exports – or more specifically, the disruption in exports – could accelerate farm business exits and sales for many in agriculture and rural communities.

While American producers are much more efficient and productive as a result of globalization, other countries around the world are capable of filling a void. Oceania, Canada, South America and Eastern Europe are each in prime positions to expand exports, especially in this environment where agricultural supplies and suppliers are abundant.

Moving to a longer-term outlook, is a new economic cycle emerging? In last fall’s quarterly report, we discussed the various reasons for underwhelming economic growth, or “slow growth orbit.” Specifically, since the year 2000, this could be an emerging trend that points to a new direction in global economics.

The period of postwar 1945 to 2015 can be described as the “era of globalization.” This time period focused on reconstruction of war-torn areas in Europe and Japan, and eventually gave way to the commodity super cycle created by the economic growth in China and the emerging nations (Brazil, Russia, India, China, South Africa, South Korea, Indonesia, Mexico and Turkey). Postwar, the Baby Boomers rippled through the economy creating higher standards of living and wealth accumulation. The world economy had moved from agriculture to the World War II era of manufacturing, and then from manufacturing to an information-based society. This era of 65 to 70 years peaked with the unification of Europe and the creation of the euro currency that now accounts for about 25 percent of the world economy. Today, slower growth across the globe continues to increase disparity in wealth and income, as well as generate general movements of nationalism and populism. This begs the question whether globalization has run its course.

In considering this new movement, let’s examine some of the drivers of change along with other, more general observations. First, the European Union (EU) will continue to play an important role in global change. As contrasted to the U.S. system, the EU cannot benefit from the efficiencies of free exchange of goods and services, and common currency throughout all the states. In fact, the varied cultures and histories in the EU can reduce the mobility of available labor and capital. Of course, this breakdown in beliefs between cultures is not as prevalent in booming economic times, but is exposed in more difficult economic climates, such as the one the EU continues to face.

Further, disparity in taxation strategies and economic growth policies have created discontent between countries in northern and southern Europe. As we observed with Brexit, this type of disparity charges extremist political bases. This year’s elections in France and Germany will largely determine the rate of economic and social change in this region of the world for some time to come.

Ascending from the number-seven world economy to number two, and in a 15-year period, China has also been a beneficiary of recent globalization. In large part, its economic rise was due to the open trade of goods and services with wealthy nations such as those in North America and Europe. But China’s rapid growth led to misallocation of capital and inefficient infrastructure, which left ghost cities and roads that led to nowhere. Of course, the results have been a real estate and stock market bubble, along with a bifurcated Chinese economy where poor, rural areas are further isolated from wealthy urbanites. In the next 10 years, the world will watch with interest as China deals with limited natural resources and leaders who attempt to use nationalism to achieve internal stability while remaining a significant global player.

Is there a directional shift toward populism in the U.S.? As the drivers of social, political and consumer change, the Millennial generation (ages 18 to 34) will answer this question shortly. While much more globally aware than the previous generation, will the Millennials support protectionist policies? In the absence of a U.S. economic growth spurt, or an extended downturn, will the trend be populism?

Among these variables, other countries also represent potential change. For example, India will be the world’s largest English-speaking population within two decades. Yes, India is experiencing some economic issues, but this westernized country has a strong demographic of young people. Also, Mexico, Southeast Asia and Oceania all have an up-and-coming young demographic that could become new power centers for the globe.

While the direction is unknown, the agriculture industry will be on the forefront of these monumental shifts, and sometimes in the crosshairs. Will these global changes be temporary and revert back if China emerges as a leader of global commerce? Will the U.S. follow the economic and political paths of Japan and Europe, or will the Gen Xers and Millennials bring new growth? As global changes continue to evolve, expect more volatility and plan for more flexibility in the business, family and personal lives.