US: agri-boom
While the US economy remains mired, one sector will continue to stand out as first quarter company earnings begin to be announced this week: agriculture. Not long ago, it was assumed that the US conventional farming sector would continue its gradual decline, in the face of lower cost producers in the southern cone (especially Brazil), the allure of organic farming, and as government subsidies were redirected towards 'rural conservation' instead of crop production. But now the industry may be in the midst of its biggest boom since the early 1920s.
The sectoral surge has been driven, in part, by external factors, as rapid growth in the developing world has increased consumer demand for meat and animal feed. Surging energy prices have also pushed up demand for biofuel, which in the United States consists mostly of ethanol derived from corn. This has driven prices to record levels, in nominal terms. Soybeans have rocketed from 8.50 dollars in August 2007 to 12.79 late last month; wheat, flax, corn and most other agricultural commodities have experienced similar rises. Despite higher input costs, farm incomes have risen almost as fast.
Yet some of the factors involved in the US agri-boom have been self-created:
Washington continues to actively encourage -- and indirectly subsidise -- agricultural exports. While this has retarded global trade liberalisation, and helped stall the Doha Round, it has increased the price competitiveness of US agricultural products on global markets -- particularly relative to competitors, such as Argentina, which have slapped export tariffs on agricultural commodities in a self-defeating effort to hold down domestic prices.
Early US corporate and government investment in genetic modification (GM) technologies has also paid off. US GM firms are now world leaders, having established a strong presence in markets such as Brazil -- stealing a march on their EU competitors, who have been handicapped by resistance to GM products in their home countries. Monsanto, the US industry leader, has seen its share price surge from 15 dollars in late 2004 to over 110 dollars this month. The company announced on April 2 that its fiscal second quarter profits had doubled on the previous year, to 1.13 billion dollars.
Some analysts, and the US government, expect the agri-boom to abate relatively soon. Estimates suggest that up to 30% of the price of staple cereals is due to market speculation. The US Department of Agriculture believes that prices will come down, as farmers increase production and boost cultivation of high demand crops. Yet global consumption has exceeded wheat production for seven of the last eight years, and most other agricultural commodities evidence similar demand. This summer, and perhaps over the medium-term, ripening wheat will not be all that's golden on the US farmstead. |
