Tuesday, October 26, 2010

Those Amber Waves Are Fueling Exports

Bloomberg Businessweek reporters Whitney McFerron, Jeff Wilson, Shruti Singh and Elizabeth Campbell write that just a few years ago, who would have guessed that farms would turn out to be a bright spot in the U.S. economy? Farmers were fretting about falling prices and mounting competition from Russia and Ukraine. Today drought has withered much of the Russian and Ukrainian crops, and the world needs more grain—and soybeans and pork—than ever. The best place to get it: the fertile soil of the U.S. Midwest and South, home to some of the most productive farms on earth.

In the first eight months of 2010, U.S. agricultural exports increased 14 percent, to $69.8 billion, from the same period a year earlier, according to the most recent U.S. Agriculture Dept. data. Joseph Glauber, chief economist for the USDA, says farm exports in the year that began on Oct. 1 may top the 2008 record.

This cornucopia is providing an unexpected boost to President Barack Obama's drive to double exports by 2015. China's need for cotton, pork, corn, and soybeans will make it the second-biggest U.S. agricultural trading partner in 2011, the USDA estimates. Shipments of farm products to China will total $15 billion, compared with Canada's $16.8 billion and Mexico's $14.6 billion. Corn prices are up over 60 percent since June, while wheat as much as doubled. "It's going to be the best year American farmers have had in two and a half decades," says Dennis Gartman, an economist and editor of The Gartman Letter in Suffolk, Va.

The cash that farmers are fingering in their pockets is boosting companies at home as well. While agriculture accounts for just 1 percent of the $14.3 trillion U.S. economy, the actual impact of surging prices may be 10 times more once spending on equipment, seeds, grain handling, and food processing is added, says Jason Henderson, an economist at the Federal Reserve Bank of Kansas City.

Sales of farm equipment are correlated to growers' cash receipts, which should increase 24 percent, to $118.4 billion, for major crops in the 2010-11 season, Ann Duignan, an analyst at JPMorgan Chase (JPM) in New York, said in an Oct. 8 report. That's good news for Moline (Ill.)-based Deere (DE), the world's largest farm-equipment maker as well as rivals Amsterdam-based CNH Global (CNH) and Duluth (Ga.)-based Agco (AGCO), she says.

Deere's per-share profit will more than double, to $4.25, in the current fiscal year, according to the mean estimate of eight analysts surveyed by Bloomberg. Cargill, the giant grain handler and food processor, said on Oct. 12 that thanks to price volatility and the performance of its affiliate, fertilizer producer Mosaic (MOS), profit for the latest quarter rose 68 percent.

Back in the 1980s, falling prices, record-high interest rates, and too much farmland bought on credit prompted a wave of farm bankruptcies. Now low interest rates are amplifying the boom, says Tom Neher, vice-president for AgStar Financial in Rochester, Minn. The bank issued twice as many farm-equipment loans as expected in a recent promotion. "I've seen more brand-new combines bought than I've seen for a long, long time," says Neher, who helps manage $2.1 billion in grain-related loans and leases for AgStar. "When you can get a machinery loan for 4 percent interest, that's about as low as it ever gets."

There are limits to how much cash will trickle down to the Main Streets of rural America, says Ernie Goss, an economics professor at Creighton University in Omaha: "You have fewer and fewer farms, and fewer and fewer farm families, so it hasn't spilled into small businesses like the drugstore or the shoe store." Farm prices have been supported by a lower dollar, which boosts exports, and not by rising domestic demand, says Goss. Small businesses "are mystified by all these reports about how wonderful the rural economy is. That's because they're selling in Greeley, Neb., and the farmer out there is selling in Beijing."

Still, the mix of foreign demand and a weak dollar is the best news farm country has had for decades. "It is a perfect situation for U.S. farmers, the best since the early 1970s," says Bill Adams, a trader at ACT Currency Partner, a currency and commodity specialist in Zurich. "There will be quite a few Cadillacs sold in the Midwest this Christmas."

The bottom line: Farm exports from the U.S. are rising fast. That's benefiting farm-equipment makers, fertilizer companies, and other suppliers.

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