Market Outlook: Crop Commodities

The overseas market for U.S. crop commodities has grown substantially in the opening years of the 21st century, in large part due to the increasing size of the global middle class and a rising demand for high value products (HVPs) of consistent quality, quantity, and reliable availability. Those are attributes the U.S. Department of Agriculture (USDA) says are best met by the United States across the full spectrum of food grains, fruits, and nuts, as well as feed grains and oil crops.

“The combination of world economic growth, a continued low-valued dollar and some further expansion of global biofuels production supports longer run gains in world consumption and trade of crops. Prices are projected to fall from recent record highs, but remain above pre-2007 levels for many crops,” according to a recent assessment by USDA’s Economic Research Service (ERS).

U.S. policy on commodities underwent major changes in the 2014 Farm Act, which ended some two decades of fixed annual payments to producers based on historical production. Those were replaced by a variety of payment structures, commodity coverage, and level of yield or revenue risk, but all tied to annual or multi-year fluctuations in prices, yields, or revenues.

“The new Farm Act continues a movement toward closer links between commodity programs and federal crop insurance that began with the 2008 Farm Act, but producers also face increased choices that add complexity to the program enrollment decision,” the USDA reported. “Farmers have a variety of approaches to managing risk, including savings, off-farm employment, forward contracting and portfolio diversification.

“Insurance programs introduced in the Farm Act offer new options for covering small revenue or yield losses, both as stand-alone policies and in combination with traditional insurance. Choices among new commodity and insurance programs involve complex trade-offs requiring producers to consider both the type and level of coverage that will best protect their operations.”

Some crops that once were imported into the United States have morphed into growing – and sometimes substantial – exports, such as rough-rice, where the U.S. global market share through the next decade is forecast at about 8 percent, primarily from exports to Latin America. Others, such as sugar, have suffered from low world market prices, reduced demand in some major consuming nations, and significant competition, especially from Mexico.

U.S. policy on commodities underwent major changes in the 2014 Farm Act, which ended some two decades of fixed annual payments to producers based on historical production.

Sales of horticultural crops (fruits, nuts, berries) are expected to grow at an annual rate of about 1.2 percent through 2023 – reaching $74 billion in 10 years – but only 0.2 percent for vegetables and pulses (grain legumes, including chickpeas, dry beans, dry peas, and lentils). Within that sector, non-citrus production growth is expected to continue, more than offsetting declines in citrus.

The U.S. trade deficit in horticultural crops and products is forecast by USDA to nearly double by FY 23, to $23.1 billion, even as overall foreign crop sales continue to set record highs. That is in no small part due to domestic demand.

field of organic corn

Organically grown corn. Though production costs of organic corn are higher, the crops’ higher selling price outweighs the production outlays. Still, the USDA earned continued funding through the 2014 Farm Act to support its efforts to increase U.S. organic operations. Credit: USDA photo

The most recent Census of Agriculture placed the farm value of organic sales up more than 90 percent between 2007 and 2012 – to $3.12 billion – but still accounting for only 0.8 percent of the total value of U.S. agricultural production. Tracked organic export products are mostly fresh fruits and vegetables, with apples, lettuce, and grapes accounting for more than half the total in 2013.

“ERS analysis of national corn and soybean survey data found that total production costs were substantially higher per acre for organic corn and soybean operations than for their conventional counterparts. However, organic operations were more profitable than conventional operations, mainly because the price premiums paid for organic corn and soybeans outweighed their higher production costs,” the research service reported.

“The low level of organic system adoption for these crops may include challenges other than profitability, such as the high managerial costs and risks associated with shifting to a new way of farming, limited marketing and technical infrastructure and the 3-year organic transition period required to become certified and receive organic prices.”

The 2014 Farm Act provided continued funding to USDA support for organic research, financial assistance for conservation practices, certification cost-share assistance, and data collection toward a goal set several years ago of increasing the number of U.S. organic operations by 25 percent between 2009 and 2015. USDA, which implemented national organic standards in 2002, also received expanded funding for its National Organic Program, which regulates organic standards, labeling, and certification.

Only grains and feeds outrank oilseed in total export volume and value. However, despite substantial growth in both production and export sales in the past quarter century, the U.S. market share of global oilseed exports has seen a steady decline, from a global domination of more than 70 percent in the 1970s to less than 50 percent today.

While a number of factors are involved, the chief development has been unexpectedly high soybean production and exports by other nations, especially Brazil and Argentina, which have gone from less than 15 percent of the market before 1980 to more than half today. USDA also attributes much of that change to major growth in U.S. meat exports, which have increased domestic demand for soybean use in livestock feed over exports.

Nonetheless, soybean exports are expected to continue growing through the mid-2020s; the United States is the world’s leading producer and exporter of soybeans, which comprise about 90 percent of U.S. oilseed production (followed by peanuts, sunflower seeds, canola, and flax). Although large-scale soybean production in the United States did not begin until the 20th century, it is now second only to corn as the most-planted field crop.

“Countries that have traditionally exported a large quantity and a wide range of agricultural products – such as Argentina, Australia, Brazil, Canada, the European Union (EU) and the United States – are expected to remain important exporters during the coming decade. But countries that have made significant investments in their agricultural sectors and are pursuing policies intended to encourage agricultural production – including Russia, Ukraine and Kazakhstan – are expected to have an increasing presence in export markets for agricultural commodities,” according to an ERS forecast for agricultural trade through 2023.

Ohio soybean field

A soybean field in Ohio. The United States remains the world’s largest producer and exporter of soybeans. Credit: Nyttend/Wikimedia Commons

“A major challenge for U.S. agriculture is weather, especially the drought, which affects the volume of exports as well as prices,” noted Christian Foster, deputy administrator of trade programs at USDA’s Foreign Agricultural Service (FAS). “An important thing for U.S. exporters, if they have a short crop one year, is to hold on to their customers, so they work those relationships, so [that] if there is a shortfall in production those buyers don’t disappear.”

Bad weather elsewhere in the world, however, may work to the advantage of U.S. producers, he added: “A nation may have climate problems that turn them from an exporter into an importer in some areas.”

ERS predicts global demand for agricultural products will continue rising through 2023, while world production, enhanced by greater use of advanced technologies and expanding land use for agriculture, is projected to increase more rapidly than world population, enabling a small increase in average world per capita use of most agricultural products.

World trade in agricultural products also is forecast to continue rising rapidly, and while most prices have fallen from recent high levels – and are projected to fall further during the initial years of the ERS’ 10-year forecast – they are not expected to drop below pre-2007 levels. Again, that is largely due to an expected continuation of rising per capita incomes and growing middle-class income populations in developing countries, further stimulating world demand for grains, oilseeds, cotton, and livestock products.

But the forecast is full of caveats.

“A number of factors are expected to slow the rate of production growth. Many countries have a limited ability to expand planted area – and the expansion that does occur takes place on land with lower productive capacity. The growth rate for world average crop yields has been slowing for nearly two decades and is projected to slow further in the next 10 years,” the ERS warned.

Soybean exports are expected to continue growing through the mid-2020s; the United States is the world’s leading producer and exporter of soybeans, which comprise about 90 percent of U.S. oilseed production.

“Reduced public funding for research and development over the last 25 years contributed to this slowdown. Also, water constraints in some countries are impeding the expansion of irrigation. Where irrigation water is pumped from deep wells, the energy cost of pumping is projected to continue to increase due to falling water tables. Costs of other production inputs, such as fertilizers and chemicals, are also likely to remain high.”

Other concerns facing U.S. farmers are largely political in nature: trade restrictions; opposition to genetically modified organisms (GMOs); laws promoting local or regional products (usually through tariffs on imports from other nations); wars, revolutions, insurgencies disrupting free trade; and more.

The issue of GMOs, generally lumped into a “food modification” bundle with antibiotics, hormones, pesticides, and other chemicals and processes used to enhance size, coloring, pest resistance, storage longevity, etc., have been significant within the United States, as well. That has been a major reason for the recent increase in small, organic “farms” (some no larger than a small greenhouse) selling to local restaurants and food stores. Some have been so successful that they are now seeking export outlets, as well.

“U.S. exports of products such as soybeans, corn, and cotton – which have the largest percentage of production that is GMO – as well as antibiotics and hormones people may worry about in buying any livestock product, have become a challenge in the marketplace. Anything we eat domestically we consider safe, which also applies to exports. Importing countries may not see things the same way, usually not based on science but on local politics,” Foster said.

“In fact, some countries produce GMO products domestically, but won’t import them. Others may import some items humans don’t eat directly [such as corn or soybeans used to feed livestock]. The use of GMOs in corn, soybean, and cotton production here is very large and so has increased their market value; you have to believe others eventually will incorporate that technology, as well.”

U.S.-imposed trade restrictions, including embargoes, also raise roadblocks – but commodities exporters have found legal ways around many of those.

“In some cases, we are free to trade with countries so long as we don’t use U.S. government support,” Foster explained. “For example, there are restrictions on U.S. exports to Cuba, so our trade associations cannot use government funding to support exports there.

“But those sanctions don’t apply to every producer or exporter. Many state trade associations have been making a lot of trips to Cuba in recent years, where there has been strong growth in imported corn and soybeans that go to Cuban livestock production to meet the ever-growing demand of their middle class for meat products.”

Texas sorghum harvest

Grain sorghum is harvested in Navasota, Texas. China, the No. 1 importer of U.S. agricultural commodities, has begun to import sorghum. Credit: USDA photo

For the first three quarters of FY 14, U.S. exports of corn tripled from the same period the previous fiscal year, with dramatic increases to all 10 top markets – Japan, Mexico, South Korea, Colombia, Egypt, China, Taiwan, the EU, Peru, and Saudi Arabia, in descending order of volume. Soybean exports were up by about one-third, distributed across nine of the top 10 markets – China, the EU, Mexico, Indonesia, Japan, Taiwan, South Korea, Vietnam, and Thailand, with only Egypt (ninth in gross volume) showing a decline. Unmilled wheat showed a slight overall decline, despite significant increases to leading importer Brazil and eighth-place Indonesia.

Efforts by traditional importing nations to create or grow their own crop and livestock production, primarily for domestic use, also have affected the market – and, in some cases, changed its nature for U.S. exporters.

“Even as those nations work to increase domestic production, that doesn’t mean they will stop being importers. Most important, historically, our main exports were bulk commodities, but as emerging markets started to take off and middle incomes rise, demand for horticultural products began to grow,” Foster said.

“Currency exchange rates and inflation also will affect demand. And if there is a scare regarding domestic products – such as China had a few years ago regarding baby foods – they tend to turn to us. Seasonality also drives agriculture – when our products are in season, demand is greater, but when the season ends here on things like oranges, we start importing from places like Chile and Australia.”

The biggest market for U.S. agricultural commodities is China, with its huge population, growing middle class, and new openness to foreign goods.

“The No. 1 importer is China, then Canada and Mexico. The EU is a major market for U.S. exports – despite some trade conflicts – as are emerging markets, especially Asia, from Vietnam to the Philippines, and Latin America. Wherever we have established free trade agreements, such as with South Korea and Central America, all kinds of artificial barriers disappear and it is easier for U.S. products to get into those nations,” Foster said. “China is desperate to improve meat production, so we sell them record amounts of soybeans, which they need – but don’t have domestically – to feed their livestock.

“Even if China starts exporting some niche products, I doubt our surplus will go away anytime in the near- to mid-term. And if we didn’t have trade barriers, we would grow bigger and faster, even though they are our biggest trading partner already. The economy and demographic and environmental challenges all affect China’s growth. Will the nation and its middle class continue to grow is a question, and if they don’t liberalize on the political side, will that have implications? Globally, the same is true.”

Noting China has become a sustained net importer of corn, rice, wheat, and rapeseed meal and oil, long-term USDA projections expect those to continue increasing for all but rice and wheat through 2023. China also has become an importer of sorghum, which is expected to continue through the forecast period. For at least the past decade, China has been a net importer of such commodities as cotton, soybeans, soybean oil, barley, and palm oil, which are projected to continue rising. Overall, China’s aggregate net imports of grains, oilseeds, and cotton are projected to rise 61 percent (58 million tons) by 2023.

Mexico is projected to be another large growth market for imported grains and oilseeds. Per capita demand for meat in Mexico is expected to see sustained growth through 2023, further increasing demand for animal feed imports. During that period, Mexico is forecast to be second only to China in increased corn imports.

“Global expansion of biofuel production is projected to continue during the next decade, although at a slower pace than over the last half decade. As a result, demand for biofuel feedstocks also continues to grow. The largest biofuels producers include the United States, Brazil, the EU, and Argentina. The growth rates for their production of ethanol and biodiesel each drop to less than 3 percent per year. For ethanol, this is less than half the rate of the last 5 years; for biodiesel, it is only about 10 percent of the growth over the past half-decade.”

The biggest market for U.S. agricultural commodities is China, with its huge population, growing middle class, and new openness to foreign goods.

The global market in coarse grain, with corn expected to become a growing part of that trade, is projected to increase by 36 million tons (25 percent) from 2014-15 to 2023-24, driven by expanded livestock production in feed-deficit markets, such as China, Mexico, Africa, and the Middle East. However, while U.S. corn exports are expected to rebound from recent years of weather-induced production shortfalls, the U.S. share of world trade in that grain – forecast to reach 57 million tons by 2023-24 – is only expected to reach 40 percent, well below the 52 percent average share during the previous 10 years.

Washington barley harvest

Barley harvest in Washington’s Palouse Hills. The market for barley is expected to expand to 23.3 million tons by 2023-24. Credit: USDA photo

While not as large, the barley market also is expected to expand, reaching 23.3 million tons by 2023-24, in large part due to demand for both malting and feed barley. During that time, North African and Middle Eastern imports are projected to account for nearly two-thirds of all global trade, with Saudi Arabia continuing to lead all importers (40 percent in 2023-24), primarily for livestock feed, but with Iran showing the fastest growth rate. China is the world’s largest single-nation malting-barley importer, driven by strong growth in beer demand – although most imports come from Australia and Canada, and domestic Chinese malting-barley production is growing.

The EU, Australia, Argentina, Russia, and Ukraine are expected to be the major barley exporters during the coming decade.

The United States, Australia, EU, Argentina, and Canada are projected to remain the world’s leading wheat exporters, with more than 60 percent of world trade in 2023-24. However, that will be down almost 70 percent from the last decade, primarily due to increased exports from the nations of the former Soviet Union.

“Developing countries will have a growing role in the global economy and food demand. They will continue to account for most of the growth in world food consumption and in world and U.S. agricultural exports,” according to USDA projections for the next 10 years.

“While these trends will create new opportunities for the United States to expand agricultural exports, they also present new challenges to U.S. exporters. Instead of a limited number of large importing countries, the global market now includes more numerous countries with smaller import needs. Responding to these needs will require new marketing strategies by U.S. and other exporters.”

High commodity prices in 2013 resulted in record U.S. agricultural exports and net farm income.

“Projected reductions in prices for most major crops over the next several years result in declines in export values and farm cash receipts through 2016,” the ERS report predicted. “Export values and cash receipts then grow over the rest of the projection period as prices increase. Although farm production expenses also increase beyond 2015, net farm income remains historically high.”

Those numbers could increase dramatically in the future as a result of FAS trade negotiators working on two major agreements, the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (T-TIP).

“FAS experts are an integral part of the negotiating team led by the Office of the U.S. Trade Representative, and USDA’s economic analysis underpins the negotiating strategy on agriculture,” FAS Administrator Phil Karsting told the House Appropriations Subcommittee on Agriculture, Rural Development, Food and Drug Administration, and Related Agencies in April 2014. “The TPP and T-TIP are opportunities to address not only market access commitments, but also non-tariff, sanitary and phytosanitary (SPS), and technical barriers to trade (TBT) that impede our agricultural exports.

“Once these agreements are in place, the United States will enjoy unfettered access to markets representing two-thirds of the global economy. We are seeking to eliminate [EU] tariffs on exports of U.S agricultural products … T-TIP also offers an historic opportunity to modernize trade rules and to bridge divergences in our respective regulatory and standards systems. Through the T-TIP, we are seeking meaningful market access that includes commitments fr