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Learn the three fundamental drivers of agriculture’s economy

Progressive Dairyman Editor Karen Lee Published on 09 March 2017

Despite being in an economic downturn, opportunities for growth remain in agriculture.

“There are very few industries that have the growth potential this industry does.

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It’s cyclical in nature, but it is a phenomenal growth industry,” said Michael Boehlje at the Managers Academy for Dairy Professionals, hosted by PDPW in San Diego, California, Jan. 17-19.

“But we’re in a downturn,” Boehlje continued. “Let’s think about why and what we’re going to do about it.”

Boehlje, a distinguished professor in the department of agricultural economics and the Center for Food and Agricultural Business at Purdue University, said there are three fundamental drivers of the economic health of agriculture: exports; value of the dollar, which is not unrelated to exports; and interest rates, which are not unrelated to the value of the dollar.

1. Exports

Agriculture’s previous high market prices were due to a phenomenal demand for food in Asia. The driver of that demand was income. Prior to the Great Recession, income in China was growing at 10 percent. In India, it was growing at 8 percent. This can be compared to the U.S.’s typical income growth of 2 to 4 percent.

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The problem, Boehlje said, is this economic growth is slowing. Income in China is only growing at 5 to 6 percent right now. “That is still positive growth, but China’s economic growth is slowing down, and that means demand for food products is slowing down,” he said.

According to Boehlje, about 12 percent of the total goods and services in the U.S. are exported. Agriculture is almost twice as dependent on exports at 22 to 23 percent.

“If there’s only one thing you can follow because you are a busy person, you look at exports – strong exports are a healthy agriculture industry; weak exports, we’re in the tank,” he said.

2. The value of the dollar

If you have time to follow more than one thing, the second fundamental driver is the value of the U.S. dollar. This was in decline from 2002 until 2008-2009, when it has been trending upward.

“Why is that important?” Boehlje said. “Exports. If you have a lower-valued currency, people who want to buy our stuff can buy more of it with the same currency they have. If you are an export-dependent industry, you want a low-value currency.”

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The value of the dollar frequently makes subtle shifts up and down, and he cautioned to look out for erratic behavior in financial markets due to people trying to outguess the new Trump administration. Some of the moves are hype-driven, not market-driven.

Even if the value of the dollar softens some, Boehlje said it won’t drop too much because the U.S. is the strongest economy in the world today.

3. Interest rates

Being the strongest economy is related to the U.S. having the highest interest rates. “One-third of the public sector debt today is trading at negative interest rates. That is world-historic,” Boehlje said. “If you want to get a reasonable rate of interest, you want to get it into the U.S.”

Interest rates in the U.S. are increasing compared to the rest of the world, where they are flat at best, he said.

David Kohl, professor emeritus in the agricultural and applied economics department at Virginia Tech, who presented alongside Boehlje, suggested producers start watching actions by the Federal Reserve and start thinking about increased interest rates on operating loans.

“The Fed wants to go back to normal. What’s normal? Interest rates at 6 to 6.5 percent prime. In other words, that’s a 3 percent rise in interest rates,” Kohl said.

In order for someone in another country to invest in the U.S. where interest rates are growing, they must first convert their foreign currency to U.S. dollars. This increased demand drives up the value of the dollar.

“Unless those economies recover in the rest of the world pretty fast, or unless the U.S. tanks again, we’re going to see a strong currency,” Boehlje said. “It is tied to the fact that we have higher and rising interest rates. These things happen to be interconnected, and we ought to be sure we understand that.”

Increasing interest rates that give strength to the value of the dollar result in a weak export market. Because U.S. agriculture is dependent upon strong exports, these three fundamental drivers are important areas to watch.  end mark

Karen Lee
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