USDA Chief Economist Talks Food Prices, Land Values and Demand

The drought of 2012 has not increased U.S. or global food prices as much as once predicted, though there may still be time for grain and livestock prices this year to deliver some impact, according to the USDA’s top economist, Joseph Glauber.

In an interview during a recent visit to Chicago, Glauber said the impact of the drought has, in fact, been minor on food prices so far. The Consumer Price Index data for June had prices 1.4 percent above the previous year.

As the U.S. drought of 2012 worsened, and as yields came in lower than the record numbers once predicted last year, speculation that food prices would increase – especially for meat and dairy – became a familiar drum beat among agricultural economists.

“I think a lot of us were expecting to see some push up in meat prices,” says Glauber.  “We haven’t seen much. Some of that takes time, but a lot of the livestock industry’s been trying to get through a tough spring into the fall.”

The drought, matched with high corn production in Brazil, did take a toll on U.S. exports in 2012. The United States will export 17.5 million metric tons of corn from the 2012/13 marketing year, the lowest level since 1971/72.   The USDA has estimated exports to reach about 1.3 billion bushels, or 33 million metric tons, in the 2013/2014 marketing year.

“There are a lot of sources of demand out there,” Glauber says. “And, over the longer run, we will see that strength. But we will face competition, and I think it’s clear that Brazil is a major player in this market. Argentina’s been a major player and Ukraine. I think over the longer run, those export markets for the U.S. will come back, with growing demand.”

 

Chinese Demand Continues

A major factor in that demand is China. While the nearly 10 percent  annual GDP growth the country has enjoyed for most of  the last 20 years is expected to slow, there  remains a growing middle class that is expected to demand more grains and more protein in their diet, which will mean increased imports of corn and other grains.   China is the world’s second largest corn producer after the U.S., but China also consumes nearly a quarter of the world’s corn – more than the country produces. In the 2013/14 year, the gap between production and consumption in China is expected to grow to about 13 million metric tons, according to USDA data.

“We’re expecting China to import more this year than what they imported last year,” says Glauber. “I see no reason not to be as optimistic about that as we have in the past.  The growth rates in China, even with the drought, even with high prices, we’ve seen that continue.”

Adding to the China trade calculation is the potential purchase of Smithfield Foods, the United States’ largest pork producer, by a Chinese company.  One of the most significant things to watch with the deal, Glauber says, will be whether China imports more U.S. meat and grain as a result of the purchase.

“I suspect the answer is both,” he says. “They will have increased feed needs.  Feed use in China has been increasing by 8-10 percent the last few years. So it’s an important driver of the market.”

Land Values

Glauber does not see U.S. farmland values continuing to grow at the same pace as they have in recent years.  Brought on largely by the drought and sustained world demand, high prices for corn, wheat and soybeans have meant higher incomes for many U.S. farmers.

“When we were making our projections a few months ago, we were seeing farm income moderate a bit,” he says. “What that means for land values is that you wouldn’t necessarily expect 20 percent increases like we’ve seen.  A lot, though, is as much tied to the macroeconomy – what happens to interest rates.”

No one is expecting a 1980s-like spike in interest rates, which sent farmland values falling in that decade. The Federal Reserve at its July meeting reiterated that it will keep the federal funds rate below .25 percent at least until the unemployment rate falls to 6.5 percent.

Through all the risks associated with agricultural commodities  – weather, global demand, interest rates and other elements – Glauber sees one constant.

“There’s always a role for commodity markets. What you’re trying to do is reduce your exposure, and commodity markets are a good way of doing that.”

Evan Peterson is director of corporate marketing at CME Group and managing editor of OpenMarkets.

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