Corn+Soybean Digest [1]

How Agriculture Is Affected By The Economic Crisis

The USDA-ERS [2] recently released a report [3] on the effects the current economic crisis is having on agriculture. Following is a summary of the findings (view as pdf [4]).

The 2008-2009 world economic crisis has major impacts on U.S. agriculture. Declining incomes around the world as a result of the evolving worldwide recession combined with the short-term appreciation of the dollar result in significant declines in U.S. agricultural exports and sharply lower agricultural prices, farm income and employment, compared with those in 2007-2008.

Agricultural households also suffer from declining income from off-farm jobs, as the economic recession in the U.S. ripples through to rural-based businesses and loss of tax revenue puts pressure on rural government employment and social services. Because the U.S. farm sector went into the crisis with record-high exports, prices and farm income, the declines, although substantial, will bring agriculture back to trend outcomes. While there is a great deal of uncertainty concerning the full magnitude of the U.S. and global recession, the effects of the crisis are expected to be less severe for U.S. agriculture than for many other sectors of the U.S. economy.

In 2007 and 2008, U.S. net farm income equaled $87 billion and $89 billion, respectively, with each year establishing a new nominal record. Even when adjusted for inflation, these amounts reflect the highest net farm incomes since the early 1970s. Depending on assumptions about the extent of the economic downturn, this analysis projects that U.S. net farm income in 2009 could fall by 26% to $66 billion – a level similar to the average of $65 billion earned in the previous 10 years – and in the worst-case scenario to $60 billion (a drop of 33%).

The projected decline in farm income in 2009 is not expected to have much effect on national agricultural land values. Land value trends that emerged in 2008 could continue in states that showed the largest declines in rural housing values and abate in states that enjoyed double-digit increases in land values due to strong crop receipts. The economic crisis could also reduce U.S. agricultural export-related employment in the short run, as projected 2009 employment falls by 13% (a loss of 45,000 jobs).

The crisis will impact U.S. agriculture mostly through indirect international effects rather than through changes in the U.S. economy. The slowdown of growth in foreign economies will reduce import demand for agricultural commodities, resulting in lower U.S. agricultural exports and prices for agricultural commodities. Although the crisis originated in the U.S., it has spread to the rest of the world and, especially, to large emerging markets, such as China, South Korea and Mexico.

The crisis is also strengthening the dollar against most other foreign currencies, as money throughout the world flows into the U.S. as a safe haven. In 2008, the net inflow of capital to the U.S. totaled about $650 billion. The stronger dollar reduces U.S. agricultural exports by making them more expensive in foreign markets than output by competitors. This analysis suggests that as a consequence of the slowing global economy and the appreciation of the dollar, U.S. agricultural exports could fall from $117 billion in 2008 to $96 billion in 2009.

Another feature of the crisis is that declining world economic activity has caused world energy prices to decline precipitously. This will not affect U.S. agricultural producers uniformly. The fall in energy prices has reduced the price and profitability of biofuels, and thereby lowered prices for feedstock crops, especially corn. On the other hand, all producers will benefit from lower input costs implied by reduced energy and fuel prices. This report projects that in 2009, the fuel- and energy-related input costs faced by U.S. farmers could decline by 30%, returning costs to 2006 levels.

Livestock producers will be net beneficiaries of the energy price drop, as the decrease in crop prices will lower their feed costs. Macroeconomic forecasters, such as Global Insight and EIU, predict that the U.S. and world economies should stabilize in 2010 and then resume growth in 2011 near the relatively high rates of the early 2000s. The return to a growing world gross domestic product and consumer income, especially in emerging markets, will lead to a recovery in U.S. agricultural exports. Thus, this report’s reference analysis projects that by 2013, U.S. net farm income could rise to $83 billion, though agricultural exports are projected to be only $93 billion, largely unchanged from the projected 2009 value of $96 billion because of the higher value of the dollar.

The return to growth will also expand demand for energy. This shift suggests that world energy and fuel prices could again increase. Economic growth would partially reverse the effects of the crisis and thereby help producers of corn and other biofuel feedstock crops. Effects on the livestock sector will be positive because of the economic growth but negative because of rising costs for feed and energy.

The main uncertainty for the long run concerns the value of the U.S. dollar compared with currencies of other major trading countries. One possibility is that the dollar will continue to strengthen substantially, especially against the Chinese yuan and currencies of other major emerging markets. Another is that the dollar will weaken, as it did doing during most of the 2000s before the 2008 crisis.

In the first scenario, U.S. farmers will face a stronger dollar, which will reduce the price competitiveness of U.S. agricultural exports. In the appreciating dollar scenario, U.S. net farm income will decline by almost 7% to $83 billion and agricultural exports will drop by 27% to $85 billion by 2013.

In the second scenario, the weaker dollar relative to the reference case will strengthen U.S. farmers’ competitiveness on world markets. With a weaker dollar, projected net farm income will increase by 19% to $106 billion in 2013 and to $118 billion in 2017, while agricultural exports will rise to $120 billion in 2013 and $134 billion in 2017. The weaker dollar, combined with the return to world growth, will create strong foreign demand for U.S. agricultural goods, which will help keep farm income high.