January 26, 2016

By Garrett Baldwin

Over the long term, global food production must double by 2050 in order to meet expected demand. That creates a number of challenges and opportunities for the agriculture industry. Each step of the way toward this goal will be affected by short term trends, macroeconomic events, and geopolitics.

Trends that GAI News highlighted last year – energy volatility, Big Data, falling incomes, and declining commodity prices – are just as critical this year as they were in 2015.

So, here is a new batch of ten critical storylines to watch in agriculture in 2016 and beyond. 

1.     China’s Economic Woes

When oil prices decline, economists and Wall Street reporters love to point to slowing growth and demand pressures in China. They should be talking about agriculture.

The major macroeconomic storyline for 2016 centers on the world’s second-largest economy: China. Contagion threats will still exist from Brazil and Greece, but China’s slowing economic growth will have far more reaching consequences.

The first three weeks of the year saw a broad selloff on the global stocks markets due to concerns about China’s explosion in debt, currency devaluations, and stalling economic growth. Right now, investor confidence is rattled. Growth concerns are raising alarm bells in nations like Australia and New Zealand, which both export a massive amount of agricultural products to mainland China. For example, the producers of one booming Australian export to China – baby formula – has seen their stocks plunge in the first few weeks of 2016 as exposure to the cooling economy weigh on investor sentiment.

Even the U.S. economy, which has shown strong resilience in the face of a slump in emerging markets, is not immune to a slowdown in Chinese demand as the nation accounts for 20% of all U.S. farm exports, according to the USDA. In fiscal year 2014, American producers exported a record $29.9 billion to China (and Hong Kong). Top selling products included soybeans, grains, hides and skins, tree nuts, coarse grains, cotton, and beef.

A slowdown in China’s economy is a slowdown in the global demand for agriculture products and many other commodities. Although the Peoples Bank of China has committed to increased transparency and forward-looking policy expectations – it’s still very difficult to trust government data at this time. While the nation’s GDP may have “officially” grown by 6.9% in 2015, this figure is questionable (and its slowest growth rate in 25 years). And despite “break-the-glass” policy efforts by the country’s central planners to prop up its domestic markets (including several rounds of currency devaluations over the last year), the Shanghai Composite Index fell more than 20% from December 22, 2015 to January 15, 2016.

Such a downturn puts pressure on Chinese commodity producers. The nation may implement even more protectionist policies in order to limit imports and guard its local markets from worldwide producers.

2.     Currency Woes Continue

On January 20, 2016, oil prices slumped below $27 for the first time in 13 years after Western powers lifted sanctions on Iran. The decision will allow Iran to again sell its oil back onto the international markets, adding even more supply to the global glut at a time that demand growth appears to be stuck in neutral. Falling oil prices have punished net-export nations of crude supplies and other major commodities.

Brazil is struggling to find a bottom as the Real cratered more than 45% against the dollar in 2015. Meanwhile, political reform in Argentina is likely to lead to several rounds of currency devaluations as the nation struggles to pay off its loans. In Canada, the Loonie fell nearly 20% against the dollar in 2015. The Aussie dollar was off more than 11%. Russia’s Ruble fell more than 18% against the dollar.

Finally, China’s central bank cut the currency’s value on multiple occasions in order to strengthen its exporting position. However, these decisions by China’s central bank have had major repercussions in recent months.

Declining currencies should be a boon for exporters, but global currency weakness and stagnating economic growth threaten the demand side of the equation.

3.     Let’s Talk About the Weather

The biggest weather story centers on El Niño, a phenomenon that disrupts growing seasons when large swaths of ocean water develop unseasonable weather conditions. Short term price spikes are common when weather damages crops, and like 2015, the weather could wreak havoc on producers.

The Climate Prediction Center predicts that El Niño conditions will continue into the spring. The El Niño of 1997 to 1998 caused economic impact of $30-$45 billion, according to Ancha Srinivasan, principal climate change specialist at the Asian Development Bank.

But Srinivasan told CNBC in November 2015 that this figure is expected to be even higher as El Nino is on track to have one of the three strongest weather patterns in roughly 70 years.

El Niño is expected to affect production from Indian chickpeas to Brazilian sugar farms. From Malaysian palm production to soy in Argentina. The weather could undermine the U.N. General Assembly declaration that 2016 is the International Year of Pulses (IYP).

But it has the potential to do far worse. According to the Financial Times, people in 33 nations – the bulk of which are in Africa – could face food shortages due to flooding or droughts created by El Niño patterns (in addition to violent conflicts in nations like Yemen and Syria).

4.     Industry Conditions Ripe for Consolidation

U.S. companies are facing their first earnings recession since 2009.

Corporate profitability is on the decline and organic business growth has evaporated.

Companies in the sector are relying on mega mergers to meet investor expectations and drive shareholder value. That was evident in the 2015 mergers between agrichemical giants Dow and Dupont, and food processing giants Heinz and Kraft. With interest rates still near historical lows and weakness across the sector, additional consolidation is likely.

But while the big name companies are in focus, we could see additional consolidation at other points of the supply chain, including the grain purchasing and processing segments. In December, COFCO Corporation sank $750 million into the final 49% stake of Noble Agri that it didn’t already own. And ChemChina and Monsanto appear to be in the onset of a massive bidding war to purchase Syngenta.

5.     Technology Focused on Protecting the Wallet and Farm

Falling commodity prices and incomes have placed a strain on the amount of money farms can spend on new technology. At the Quad Cities Farm Show in January, the focus centered on cheaper and more efficient technology.

But one area of tech spending is set to surge: Protection against farm theft.

Farm theft is big business, and it’s getting worse according to farmers in remote areas around the country. From stolen farm equipment, to cattle rustlers, from missing crops to water theft, it’s time for technology and legislators to tag team the issue in 2016.

On the tech side, the agricultural sector is set to lead growth in the sales of unmanned aerial vehicles (UAVs) – better known as drones – in 2016. Research firm Juniper predicts that farms will produce 48% of all commercial drone demand this year. The technology allows farmers to regularly survey crops, improve security, and spot thieves.

6.     Tackling Food Waste

The anti-food waste revolution is accelerating from the halls of the United Nations to the Congressional offices in Washington D.C.

According to a report by the Natural Resources Defense Council, 40% of all food produced in the U.S. goes wasted, a figure that represents an annual cost of $1,500 for a family of four. It’s also about 20 pounds of food by each American every month.

But most of that blame falls in public perception and understanding of products. From farm to fork, the amount of food that Americans have thrown out has increased by nearly 50% since 1974.

U.S. Representative Chellie Pingree recently introduced a bill before Congress designed to clarify misleading or confusing “sell-by” dates on agricultural products, improve donation incentives, and address negative bias against imperfect produce items. This subject was covered by television media in 2015, including John Oliver and the documentary, Just Eat It, A Food Waste Story that aired on MSNBC last year.

Meanwhile, the United Nations has set a goal to cut food waste by 50% by 2030.

The surge of food waste has economic, environmental, and social consequences.

7.     Time to Get Antibiotic Dangers in Focus

Will 2016 be the year that antibiotic resistance causes a serious disruption in the supply chain? Livestock producers have said they are working toward the elimination of sub-therapeutic antibiotics. However, demand for such product has been strong sector-wide.

With these treatments come worries about bacterial drug resistance.

The Johns Hopkins School of Public Health has raised public health concerns from farm to fork. Antibiotic resistance headlines a long list of public health concerns. But additional ones tied to meat production include influenza viruses, food-borne illnesses, increased blood pressure, depression and anxiety. Hopkins policy experts argue that practices in industrial food animal production (IFAP) are “eroding the effectiveness of these life-saving drugs.” The university warns that drug-resistant infections are growing costlier for humans and have become even more difficult to treat.

This year, the Food and Drug Administration will issue animal antibiotics guidance to drug manufacturers, and implement the 2015 Veterinary Feed Directive. New FDA guidelines facing a 2017 deadline will require stricter labeling rules on antibiotics to be used in animal feed and water. The same goes for labeling from veterinarians issuing drugs for animal production.

8.     Precision Technology

Last year, Bob Gore of Silent Partner Strategies argued that the application of precision agriculture wasn’t just going to become a trend, but that it would eventually become a mandatory practice to ensure long-term sustainability. This practice – requiring the precise application of pesticides, fertilizers, grains, water, and other inputs, will accelerate with the wide-spread adoption of big data and precision technologies. These practices maximize productivity and boost agricultural yields.

These applications have been remarkably successful at the academic level and in the heavily mechanical farms of Western nations. But many have argued that precision agriculture could be the solution to farming problems in India where 80% of farms are smaller than five acres. As the nation’s Prime Minister continues to reduce bureaucracy and red tape throughout the farming sector, precision agriculture may help revolutionize farming practices in a nation desperate for sustainability, technology and productive labor.

We should see greater adoption across the globe in 2016.

9.     Trans-Pacific Partnership: Friend or Foe?

U.S. government policy has a dramatic impact on the broad agricultural sector from farm to fork. And this year’s blockbuster question is whether or not Congress plans to ratify the Trans-Pacific Partnership (TPP), the largest multilateral trade agreement since NAFTA.

If ratified by the United States and 11 other Pacific Rim nations (not including China), it will eliminate roughly 18,000 tariffs and reduce trade barriers for U.S. agricultural producers.

According to the Peterson Institute for International Economics, the TPP will boost global GDP by roughly $225 billion by 2025 and a 6.6% jump in global agricultural trade.

That figure includes a boost to U.S. GDP by $77 billion.

But this deal certainly faces a number of critics.

National Farmers Union (NFU) President Roger Johnson doesn’t think that the TPP will stand up to its promises to boost job growth, economic activity and trade cooperation. In public statements, Johnson projected that the deal will hurt rural farmers and the nation’s trade deficit due to the participation of nations that have manipulated their currencies in the past. Concerns about currency manipulation are well understood due to the impact on U.S. job growth and the comparative cost of labor between partnering nations.

According to the Economic Policy Institute, currency manipulation has been the largest driver of job outsourcing from the United States, costing Americans more than 3.2 million manufacturing jobs between 2001 and 2013.

10.  Interest Rates, Farm Prices, and Commodity Yields

Economists clamored around their television sets in December when the Federal Reserve announced it would raise benchmark interest rates for the first time since 2006. Banks quickly increased lending rates to their prime customers but didn’t increase savings rates on accounts or CDs. Not many expect that rates are going to increase for long-term loans like mortgages or farm land purchases in the next few months. That said, the era of low interest rates likely pushed farmland prices above their true value – and new dangers are emerging for the sector.

The danger of higher interest rates is the impact on commodity prices due to the stronger dollar. In addition, higher interest rates – when factored in with falling commodity prices and record low crop yields in some areas – could weigh down farmland values in the future, particularly in the Midwest. During the third-quarter of 2015, prices for “quality” farmland in the St. Louis Federal Reserve Bank’s district, a region that includes portions of Illinois, Indiana and Missouri, fell 2.6% from the previous year. But the numbers look challenging under the weight of falling commodity prices.  Purdue University Agriculture professor Craig Dobbins told a local news outlet January that farmland prices could fall in Indiana by 5% to 12% in 2016.

The prices of corn and soybeans have fallen by nearly 50% during record levels in 2012. Agricultural economists project that net farm incomes are near a 13-year low, according to USDA data, and are down roughly 55% from a record $123.3 billion in 2013, the U.S. Department of Agriculture estimates.

Net income will be under greater pressure with the dollar rising against other currencies around the world. Competition from Brazil, Ukraine, and other exporters of soy and corn will boost production and benefit as American producers face constraints. The USDA projects that the U.S. agricultural trade balance could fall to $9.5 billion this year. That’s a 78% decline from record levels just two years ago.