What will the next “growth engine” be to power ag’s future? Will the commodity model pioneered by America of producing major grain commodities at scale based on low input costs and high volume be succeeded by something else in American agriculture?
That question was raised by RaboBank experts at the recent Fall Harvest Outlook media webinar on Nov. 13. RaboBank is a multinational banking and financial services company headquartered in The Netherlands and focusing on agriculture.
The first presentation, by Steve Nicholson, global sector strategist for grains and oilseeds at RaboBank, noted that grain commodities remain in a supply-driven market. Most of the United States is still in a drought officially, grain prices are “in the doldrums,” renewable diesel may be at peak capacity and stocks-to-use ratios are flat or declining for wheat, corn and rice.
U.S. exporters continue to lose global shares of export markets. Soy exports to China “have been broken,” Nicholson said, never returning to pre-COVID levels except when Brazil has a bad crop year. If President-elect Donald Trump keeps his promise to ratchet up tariff duties on Chinese products again, China will retaliate, and soybean exporters in the U.S. will likely take another hit. Also, the Federal Reserve may keep interest rates high, which will weigh on exports because it creates a stronger dollar.
Producer profit margins are getting squeezed, while input costs remain high and are not expected to decrease significantly any time soon. After the COVID-19 crisis and Russia’s war on Ukraine sent mineral fertilizer prices skyrocketing, China, a major phosphate supplier, enacted export controls that helped keep phosphate prices high.
Farmers have deferred capital expenses and have traded down on some inputs like fertilizers, going for generics instead of brands. Owen Wagner, vice president of grains and oilseeds analysis at RaboBank, said farmers are having to increasingly borrow for operating costs, as their reserves from the support they received during the pandemic and the years of higher prices for their products are lessening.
RaboBank farm input expert Sam Taylor noted that high input cost structures for fertilizer, seed, agrochemicals and machinery are likely to remain in place for the next six months at least. Equipment manufacturers like John Deere are laying off employees, since farm equipment is the first input that producers defer investing in during times of tight margins. Companies that make biologic soil products have seen a shakeout, Nicholson said in the Q&A, creating opportunities for investors to buy and consolidate them.
Wagner said he expects producer borrowing to increase by $25 billion for operating loans over the next several years. It’s a trend that’s already happening, he said. In the first half of 2024 alone, operating loan volumes were up by 12% year-over-year. Wagner said operating loans are a surer indicator than real estate credit lines, which are “more subtle” as economic indicators.
Soybean exports as growth engine
Beginning in 2012, grain exports to China, especially soybeans, were a major growth engine. That era of spiraling growth in soybean exports to China is ending, Wagner said, due to many factors. One is that the Chinese population has stabilized. It began shrinking in absolute terms in 2022, thanks to its long-standing one-child policy enforced by the Chinese Communist Party until 2016. China’s population is forecast by the United Nations to drop to 1.3 billion in 2050 and then plummet to only 770 million in 2100. In addition, Chinese diets may be close to a satiation point, meaning most Chinese are getting close to as much meat as they want.
Another moderate growth engine for soybeans and other ag feedstocks, including corn, has been demand for biofuels. That demand has remained constant domestically, as charts displayed by Wagner showed. The inconsistency of support for biofuels from the Biden administration has introduced uncertainty into the markets, however. The stance of Lee Zeldin, Trump’s pick to head the Environmental Protection Agency, toward biofuels is not clear.
Brazil improving
The other threat to the America commodity model is the increasing success of Brazil.
“The U.S. invented the low-cost commodity model, but Brazil is beating us at it now,” Wagner said. It has constantly improved its logistics, and it gets a major advantage from its ability to double-crop with safriñha corn.
Wagner said Brazil has 70 million acres of marginal pastureland that could easily be converted to cropland. Production costs per unit in Mato Grosso state are already lower than in Iowa.
Chinese pigs or West Coast diners?
Wagner said that up until the mid-1990s, U.S. agricultural production was more diverse than Canada’s. Then a shift to more emphasis on corn and soybeans began in the U.S. until they took up 70% of all farm acres. Canadian ag growth and real farm income have outpaced that of the U.S. since then. About 25% of Canadian soybeans are grown for direct human consumption. Wagner raised again the possibility of major commodity crops splitting up into a number of specialty, higher-premium markets, such as soybeans with special genetic traits like high-oleic beans, other specialty organic products and “orphan crops” that also have the potential for higher profit margins.
Of the four major input categories—seed, chemicals, fertilizers and machinery—seed varieties are the last input category in which producers cut spending during tight times, since farmers “tend to be optimists,” RaboBank analyst Sam Taylor said.
Wagner was asked at a recent ag event, “Do we want to keep feeding Chinese pigs, or West Coast diners?”
During a free-wheeling follow-up Q&A session, Wagner said, “The commodity model used to be low-cost. That was its basis.” To a questioner who asked how resilient Brazil is, he replied that it’s as resilient as we are. The only disadvantage it possesses is lower-quality tropical soils that may not handle climate shocks as well as rich Midwestern American soils.
To a question about tariff policy, Nicholson responded that the president’s ability to unilaterally impose punitive tariffs on particular products or in response to particular trade violations is well established in law, but his ability to impose sweeping tariffs on entire countries or product categories is less settled.
David Murray can be reached at [email protected].
