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US economy bolstered by strong agriculture sector

Dennis Parnagian and Joseph Castro discuss issues at agribusiness forum
<p>Fowler Packing Company Owner Dennis Parnagian, left, and California State University, Fresno&nbsp;President Joseph Castro, discuss issues ahead of the Agribusiness Management Conference hosted by Fresno State.</p>
Commodity prices should stabilize off of recent highs All-milk price looks to soften from record levels Livestock sector margins look to remain profitable &nbsp; &nbsp;

The U.S. economy is being helped along by an agricultural sector that rebounded much quicker than the rest of the nation’s economy after the Lehman Brothers collapse in 2008.

While there are some bright spots in the U.S. agriculture sector, Terry Barr, senior director of CoBank’s knowledge exchange division predicts global factors and a failure by U.S. lawmakers to address core issues could put a drag on greater growth.

Furthermore, Barr expects some changes in the Ag sector could reduce farm incomes in 2015.

Barr told attendees at the 33rd Annual Agribusiness Management Conference in Fresno, Calif. recently that fundamental changes in national policy related to financial reform, immigration, energy, health care, regulatory oversight, trade agreements, deficit reduction and taxes are preventing the economy from breaking loose with the kind of growth people want.

“You can’t take these items off the table and encourage businesses to utilize their pool of capital,” Barr said.

Investment is the biggest challenge in America, according to Barr.

“We’re not making the business investments that we have historically made,” he said. “We have a lot of liquidity sitting on corporate balance sheets that is not being deployed.”

At the root of this are concerns about government policy related to a host of issues affecting business in general across the United States.

While the government’s reported jobless numbers continue to look good on the surface, Barr said underemployment remains high at above 11 percent. Those are basically the people working part-time who would rather work full-time.

Low-wage jobs drag economy

Barr further stated that the low-wage, part-time jobs that are being created aren’t the economic drivers one would expect from an economy that under previous presidential administrations saw economic growth numbers greater than 5 percent.

Current government figures show the U.S. gross domestic product is currently growing at an annualized rate of 3.5 percent. This compares to an average 1.9 percent growth in 2013.

Further government numbers show that while agriculture accounts for 1.5 percent of the nation’s GDP, advanced technologies have made the U.S. a net-exporter of food.

Barr talked pretty much everything from housing starts to global monetary policy during his address. He did paint a generally positive picture for U.S. agriculture, even though not all sectors are enjoying higher commodity prices and great returns.

A recent report issued by CoBank suggests a shift in the global economy with continued favorable crop developments and record-high animal protein and dairy prices signaling transitions ahead for all agribusiness sectors.

The report, titled “Toward a New Pricing Paradigm,” suggests that the extended wave being ridden by U.S. dairy producers will subside in 2015 as the national all-milk price comes off its record highs at more than $20 per hundredweight. CoBank expects U.S. dairy processors will continue to absorb elevated raw milk costs in the closing months of the year with lower milk prices in 2015.

CoBank believes that the animal protein sector of the U.S. Ag economy is at an early stage of what promises to be an aggressive expansion of meat supplies. Milk production continues to grow steadily worldwide, and a more favorable feed and forage cost environment is likely to accelerate this pattern.

Livestock sector excels

U.S. livestock producers continue to enjoy higher output prices, coupled with lower production costs and favorable margins. Record corn and soybean production should help to keep input costs lower, but looking longer term, CoBank believes profitability in the livestock industry will be determined in large part by the resilience of domestic and international consumer demand to record high beef prices.

While fruit and nut prices continue to remain a bright spot in the agriculture sector as well, according to Barr, others are worried as yields this year for popular nut crops like pistachios and almonds did not make early forecasts because of California’s drought. Some experts worry there will be a long-lasting impact in those two markets as the drought lingers and water prospects for farmers remain uncertain.

The CoBank report suggests that after many years of strong growth, U.S. agriculture is facing greater market uncertainty and new challenges. Those challenges could include rising interest rates, a strengthening U.S. dollar as compared to other world currencies, diminishing political support in Washington D.C., larger global harvests and rising commodity carryover inventories.

After years of U.S. monetary policy that saw the Federal Reserve drop interest rates to 0 percent and keep them there, Barr suggests very few in the financial industry believe this will last much longer. Most surveyed recently believe rates will come off their floor in 2015; how high they go and how abruptly they rise is anybody’s guess, he says.

“That’s really not sustainable for very much longer,” he said of the 0 percent interest rates.

Interest rates must rise

Global interest rates should track with Federal Reserve rates, though there is some concern among foreign banks as to how fast they rise, he said, because those increases will have implications on economies that are even more fragile than the U.S. economy.

Global oil prices are having an impact on markets and political decisions as U.S. consumers enjoy a significant drop in gasoline prices at the pump. Russia and Ukraine are looking at significant financial troubles because of the political unrest there and the impact shrinking oil prices have on their economies.

Barr says Saudi Arabia is quite concerned with the drop in oil prices and, though a 20 percent boost in the value of the U.S. Dollar has helped them weather an 18 percent drop in oil prices. Most concerning to the Saudis, Barr says, will be capping competitive production and expansion of global oil markets to keep the price of oil from falling further.

Loosely related to this is a long-awaited resurgence in the profitability of U.S. ethanol in 2014. According to the CoBank report, depressed corn prices will incentivize increased ethanol production, further dampening margins in that industry.

The U.S. energy sector is in a state of uncertainty, though there are reports that U.S. oil production continues to increase, which some say is leading to lower oil prices on world markets.

Barr believes if the new Congress can make key infrastructure investments in projects such as the Keystone Pipeline there could be some positive results to the U.S. economy.

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