The worm has turned. It may be a slow crawl for some time yet, says Texas AgriLife Extension economist Charlie Hall, but the news is not all bad at the moment and recovery from recession seems to be in progress.
Hall offered an assessment of the U.S. economy and the potential for agriculture during the annual Texas Plant Protection Association conference in College Station. He says all segments of the U.S. and the world economies may not show signs of robust recovery yet, but some elements that are still struggling seem to be “getting less bad.” Unemployment, for instance, remains at 10.2 percent to 10.8 percent and is focused primarily in the center of the country.
“Many sectors are either stabilizing or getting worse at a slower rate,” Hall said. In agriculture, producers who “differentiated” themselves by producing higher quality, adding value, or finding niche markets have done better.
“Ag recovery will be slow compared to historical norms. Farmers must grow, but grow smarter. They must be prepared for new risks and new opportunities with the coming recovery.”
He said the United States continues to set the standard for agriculture and U.S. farmers “must be smart in capturing new opportunities.”
The news in the past few years has not been all bad for agriculture, although farmers and ranchers have shouldered their share of economic woe. Hall said five of the most profitable years on record for U.S. agriculture occurred from 2000 through 2007. A $57 billion farm income in 2009 marked a 34.5 percent decline from 2008 and was $6.5 billion off the average $63.6 billion.
“Even with that decline, we had one of the highest eight year averages ever,” Hall said.
Hall said farm expenses played a key role in the income decline. “Farm expenses peaked in 2008 and declined in 2009. Fertilizer price was a big factor. We also see a 79 percent correlation with fertilizer and fuel prices.”
He said fuel costs will get some relief, with a $2.63 average price for the year. “We project $2.75 for spring. And natural gas prices are at a historical low and we expect a $2.60 to $2.65 range into summer.”
But energy is a “dual-edged sword,” he said. “Low energy prices also affect the value of biofuels.”
The value of the U.S. dollar also gives with one hand and takes away with the other. “The value of the dollar has been erratic since 1995, when it was rising. It has declined since 2000. The devalued dollar helps agriculture, making products more affordable.”
The flip side means devalued dollars make the United States a risky investment worldwide. “China is not buying treasury bills and that affects our overall economy, which affects agriculture,” Hall said.
He cited two major factors that affect U.S. agriculture — the gross national product of major countries and exchange rates. “Nothing affects agriculture more than the devalued dollar.”
He doesn’t expect the world economic slowdown to have a significant, long-term impact on U.S. agriculture. He expects a slight decrease in food and fiber consumption, but nothing significant. “We will see a shift in how consumers buy food. They will eat out less and will buy more items in bulk. They also will shift to less expensive items.”
Hall said farmers who have maintained good relationships with their lenders likely will have little difficulty obtaining loans. “Those without good relationships could be in trouble,” he said.
The global recession has been broad based, Hall said. “A lot of countries, including key trading partners, have been hurt by the recession.” Developed countries have not fared well, he said, but China and India have not been hurt as badly as some more developed trading partners.
“China is a significant importer for world agriculture. The United States remains a major player, but has declined in some commodities. We’re still strong in corn and soybeans.”
He said higher prices for corn and soybeans since 2004, spurred by both feedlots and biofuels, pushed prices. But expenses have increased at almost the same rate.
Hall said the recession may have been worse than usual because “we had to battle a number of difficulties at the same time. We’ve had 11 recessions since 1948 and they are part of the business cycle, necessary to restrain the inflation rate.”
Significant problems included energy costs, losses in auto manufacturing, aging infrastructure, war, health care, education and the environment.
“The boom in the economy created a lot of instability,” Hall said. “Greed overcame logic and rational behavior.”
He said the belief that everyone is entitled to own a home, regardless of the ability to pay for it, created a crisis in the housing market. “We saw a lot of hubris in the financial world and in the monetary policy. We saw a failure of corporate governance and we know that households saved too little and borrowed too much. We underestimated the risks in the financial markets.”
The overall economy, he said, has begun to show some signs of recovery. Inflation remains stable, interest rates are favorable, the stock market is rebounding and the housing decline seems to be bottoming out. Hall said the silver lining in the dark cloud that’s covered the housing market is that now we have “unprecedented housing affordability. Home prices have a ways to go. We may not have seen the bottom, but I think the trend is turning following an increase in November.”
He said the savings issue may not be as bad as some folks believe, either. “The savings rate has declined over the past 20 years, but numbers do not include homes or 401Ks. We’re doing better than some think and I think that will improve.”
Spending, he said, might decline as folks learn lessons from the past few years, but they will not make as big a change perhaps as they should. “Spending is too engrained in American consumers. Spending may be a bit more refined, however.”
Hall said economists have “attracted a lot of attention over the past 18 months. A lot of economic theory was thrown out the door and economists got a lot of blame for not recognizing the writing on the wall.”