Can anything positive come from sustained low prices for soybeans and corn over the past few years? At least one analyst believes so.
Mike Kvistad, commodity analyst for Benson-Quinn Commodities in Minneapolis, says a drive through the countryside reveals a positive aspect of low prices that may lead to a golden age for U.S. agriculture.
“The industry has ratcheted down expenses and is trying to run as lean and tight as possible,” Kvistad says. “As a result, U.S. farmers and the U.S. agricultural system are as efficient as any country in the world.”
Kvistad believes that low prices in recent years have helped spur long-term investments in facilities around the world by grain and oilseed processing companies.
This investment, he argues, can only be good for U.S. agriculture. In fact, Kvistad believes the result of this investment in processing facilities has been seen in the recent record demand for grain and oilseeds, and he expects the trend will continue in the years ahead.
Another result of low prices, he adds, is that the U.S. agricultural system has reacted in ways that should position it favorably in global markets in the future. The entire U.S. system has been forced to become more efficient because of tight margins throughout agriculture, which will position it to better compete with the rest of the world in the years ahead.
These efficiency gains will become increasingly important to compete on an international scale, he stresses, as South America, Eastern Europe and other countries continue their attempts to ramp up production.
“In any industry, those who are the most efficient have the best opportunity to participate in trade,” Kvistad says.
The highest-cost producers are at a competitive disadvantage and economics will eventually eliminate them. “If we indeed have the most efficient capacity for a specific commodity, then we'll be at a competitive advantage,” he adds.
A look at demand projections by USDA seems to lend credence to Kvistad's argument. USDA projections for both corn and soybeans show that world demand, indeed, is at record levels and has routinely made new records in recent years. In fact, USDA's estimates show steadily rising world grain and oilseed use through 2005.
In October 2001, USDA's monthly publication, Agricultural Outlook, noted that domestic use is forecast to reach a record high. In its September 2001 issue, USDA's statement on soybeans read, “Despite the large potential harvest, strong soybean demand is warding off even more burdensome surpluses.”
This is the key to Kvistad's prognosis. He says that even if prices do not rally substantially, U.S. farmers have the opportunity to benefit because of operational improvements made in recent years.
“Will revenues, of which price is a part, continue to escalate in an environment where demand continues to grow?” he asks. “I think the answer is ‘Yes.’ The significant piece that has contributed to that factor has been yield. That's been a bigger boon for additional revenue to the producer than has price.”
And, despite increased production that has resulted from higher yields, Kvistad points out that world and U.S. balance sheets for wheat and corn are tightening as record demand outpaces record production.
Bob Lekberg, a commodity analyst with Goldenberg, Hehmeyer in Chicago, agrees that sustained low prices have had something to do with the expanding demand. He also points to a steady move toward more protein in diets. Most recently, the ban on meat and bonemeal in feed rations in European Union countries has been a plus to soymeal demand. In addition, expanding world income has something to do with the increase in demand, he says.
Kvistad stresses that China entering the World Trade Organization (WTO) is also a major positive for the markets. “While the potential of this market has been talked about for years, we'll now have commitment from China to trade by internationally accepted terms. Domestic consumption has grown and is growing dramatically in China.”
Lekberg adds that China's WTO status means it will drop its subsidies on exports and commits China to import specified minimum quantities of products. However, he adds, “They will buy regardless of their quotas if they need it.”
Kvistad says this all simply means U.S. producers are well-positioned to benefit from increasing worldwide demand — whether it's through continued yield increases that result from application of technology put in place in recent years or through price spikes that arise from supply threats.
“The market has come to expect ample supplies at low prices every year,” Kvistad argues. “What happens if there's a hiccup in supply? Most likely a vibrant price rally will be the result.”
In the end, Kvistad says given the prospect of continued record demand for corn and soybeans, and the advantages U.S. producers have over the rest of the world in technology adoption, the idea of a golden age for agriculture may not be so farfetched.