Vulnerable Economy, Hungry China to Influence U.S. Agriculture

2/22/2014 7:00 AM
By Philip Gruber Staff Writer

EAST EARL, Pa. — Despite falling grain prices and a heavily indebted domestic customer base, U.S. farm products are still in demand at home and around the world.

“It’s still going to be a good year for agriculture in the country,” David Swartz, a Penn State Extension district director, said Feb. 18 during the Keystone Pork Expo and Poultry Progress Day at Shady Maple.

Total U.S. farm income this year is expected to drop 27 percent from 2013. This year’s returns will be measured against last year’s record $130 billion in receipts, however, and farm income should be strong compared with other past years, Swartz said.

Regardless of anyone’s personal convictions about the Affordable Care Act, the law “has been an unneeded drag” on the economy, Swartz said, “simply by the jerks and starts by which it’s been implemented.”

The health care law has also created uncertainty for small businesses and farmers, he said.

New banking regulations threaten local and community banks, whose competition helps keep interest rates low for farmers, he said.

If regulatory burdens start to drive smaller banks out of business, farmers could be stuck taking big banks’ higher rates. That has happened already in Canada, where a half-dozen banks control the market share, he said.

Other factors can indirectly influence agriculture by hurting the broader economy. One-third of the nation is not working, and student loan debt has exploded in the past 10 years, Swartz said.

Since 2003, the number of people with student loans — and the amount they owe — has doubled, Swartz said. College loans now top $1 trillion.

Swartz said the student loan situation reminds him of the housing crisis, which was blamed for starting the recession.

In both cases, the government provided money and encouraged banks to make loans to people who were unlikely to repay them, he said.

Already, 12 percent of student loans are delinquent by at least 90 days, and more than half of student loans are held by students with a household net worth under $8,500, he said.

If student loan programs implode, the government could decide to nationalize all student debt.

“Then we all owe the money,” Swartz said.

In more specifically agricultural considerations, the price of corn has fallen 35 percent to $4.50 per bushel. Forward contracting has blunted some of the blow to grain farmers, he said.

Because 75 percent of Pennsylvania’s agriculture is related to livestock, the state should benefit from falling grain prices, Swartz said.

Soybeans are the one grain that has bucked the downward trend. Despite the expected surge in South American production of soybeans, “soy meal has not fallen at all” and even increased in price recently, Swartz said.

“I don’t expect the price of beans to fall that much” because of the Pacific Rim’s insatiable demand for plant protein, he said.

China, for example, is home to 90 percent of the world’s fish farms, and soy meal is a common fish food, Swartz said.

New Pioneer and Monsanto soybean varieties with a high oleic oil content offer promise, Swartz said. Oleic oil is similar to olive oil, which is considered the healthiest oil.

Fast food companies were the ones that pushed for the high oleic soybeans, but they were not looking to market a healthier product, Swartz said. High oleic oil is very stable when repeatedly heated, meaning it turns rancid slower than other oils.

“Now, the fast food restaurants don’t have to change their oil as much,” Swartz said.

Poultry continues to be strong in Pennsylvania. The state produces 7 billion eggs and 155 million broilers yearly. The number of turkeys in the state has decreased, but the price has increased as a result, he said.

Beef remains in a precarious position. The retail price hit a record high of $5.39 per pound last August, and the country has its fewest cattle in 60 years.

“Sooner or later, there will be customer resistance” to the high prices, Swartz said.

Fortunately, the export markets for beef and pork remain fairly strong.

Swartz said Mexico and Canada are the largest buyers of both meats, thanks to the North American Free Trade Agreement, or NAFTA, which abolished customs duties on trade among the U.S. and its North American neighbors in 1994.

Japan and South Korea are also big importers of both products because of their long alliance with the United States, Swartz said.

The countries of Southeast Asia still prefer to get poor-quality beef from Australia instead of importing U.S. beef. Countries like Vietnam and Cambodia do not eat a lot of beef anyway, Swartz said.

One in four U.S. pigs go overseas. Of the pork that stays in the country, bacon belly continues to outprice all other cuts, which is ironic considering the national health craze, Swartz said.

U.S. pork producers are afraid to grow their herds until porcine epidemic diarrhea virus, or PEDv, is better controlled, but “long-term, yes, we should expand,” Swartz said. Countries like China and Indonesia are hungry for U.S. pork.

China’s project of building a third, larger lock system for the Panama Canal is supposed to open this year. Even if cost overruns delay the opening until next year, the opening of the new locks will reduce the cost of shipping U.S. farm products overseas, Swartz said.

The United States is trying to catch up to the canal’s expansion by dredging the ports of New Orleans and Miami to allow the larger ships to dock in U.S. harbors, he said.

China is not just looking to get better access to U.S. products. The Panama Canal also opens the way to Brazil, which is the world’s No. 1 producer and exporter of sugar, coffee and orange juice, and is a leading exporter of other many crops, Swartz said.

A boat that can carry 18,000 shipping containers —even larger than the new Panama Canal freighters —is also being built in South Korea.

The Triple-E, as the supership is called, would be roughly as tall as the Empire State Building if stood on end, Swartz said.

The Triple-E will be able to pass through the Suez Canal to give China access to northern Europe’s deepwater ports, he said.

With dredging, San Diego and Long Beach, Calif., could accommodate the ships too. Existing rail lines connect those ports to the U.S. Northeast, he said.

“The bigger these ships get, the more negligible the price” of shipping, which decreases the cost of U.S. farm products to foreign buyers, he said.

California farmers’ decreasing access to water could also affect the national agriculture picture, Swartz said.

In the 1940s, the rivers that flow from the Sierra Nevada were dammed to provide water to permit farming in the fertile Central Valley throughout the dry summer, he said.

The San Joaquin is an intermittent river, running in the spring when melting snow overflows the Friant Dam, but drying up in the summer. “That meant that fish couldn’t live in certain parts of the river,” Swartz said.

Environmentalists got the rules changed so that much of the water previously used for agriculture is now allocated to make the river run all year. Farmers now get 117,000 acre feet of water a year, while the fish get 302,000 acre feet, he said.

Because the summer is so dry, however, “a lot of the water they release simply gets sucked into the ground” and has done little to improve fish populations, Swartz said.

Water availability could also hold back China’s heralded agriculture boom, Swartz said. Half of the rivers in the country have permanently disappeared since 1995 because of ramped-up farm production.

Most of the country’s agriculture surrounds the Yellow River, a smaller, Susquehanna-size river in northern China. The Yangtze River, meanwhile, is double the size of the Mississippi, but it flows through southern China. The need is in the north, but the water is in the south, Swartz said.

China’s answer to that conundrum is an astoundingly expensive civil engineering plan, currently being built, to divert water from the Yangtze to the north via canals, he said.

“It would be like us building a dam at Des Moines, Iowa, on the Mississippi River to supply the drought in California, and digging through the Rocky Mountains,” Swartz said.

While some farmers have grown tired of hearing about China, the population of Japan and northeastern China equals the population of the entire Americas and Australia. More people live in East Asia than in the whole rest of the world, he said.

“That one fact alone will drive our economy and our agriculture for years,” he said.

Does milk have a lot of untapped potential in today’s competitive beverage market?

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