The U.S. agriculture industry is a major driver of the U.S. economy, but only accounts for about one percent of our country’s gross domestic product (GDP). POV talked with PNC economist Mekael Teshome and Warren Graeff, the market manager of PNC’s agriculture banking unit, to learn more about the state of this important industry in 2015 and beyond.
TESHOME: Agriculture is a bigger part of the U.S. economy than many people may realize. Our country’s efficiency in this industry built the foundation to allow us to become a leading global economy. Looking at the economy as a whole, although the agricultural output only accounts for a small percentage of our GDP (economic growth), the United States is a large exporter of agricultural products to other countries. Not only do our exports have a significant return to the U.S. economy, but they also impact global food prices and can affect developments in other countries.
GRAEFF: Because we have an efficient agricultural system, the amount of money U.S. citizens spend on food is pretty low; we actually spend less than any developed country in the world. This efficiency allows our economy to prosper in other areas – science, technology and manufacturing for example –enabling Americans to spend money on other things and enjoy a higher standard of living.
GRAEFF: Overall, food prices are expected to be moderate in 2015 with a few variations. A few examples… Last year, hog herds became ill with a swine virus. As a result, many herds weren’t able to produce, drastically hiking pork prices. Since new vaccinations for the virus were introduced, hogs have become healthier and pork production is increasing, which will moderate pricing for shoppers. Egg, corn, soybean and wheat production has become more abundant as well, moderating the prices for those products.
Beef prices, however, are expected to be higher. With the drought in the West and Great Plains, cattle numbers are low, leading to a limited beef supply and with high demand comes higher prices, as well. Other countries like Australia will likely be our saviors as we can import from them, which will moderate our pricing.
GRAEFF: Purchasing crop insurance has proven to be a highly effective risk management practice for farmers to protect their valuable business investments.
The current drought is impacting areas that are outside of where PNC does business, so this doesn’t specifically affect our farming customers. However, during the 2012 drought that hit the Corn Belt, our ag bankers met with local farm customers to discuss the potential impact. We urged farmers to obtain crop insurance to protect their investments. In this instance, crop insurance made up for 50-60 percent of lost revenue from the drought.
GRAEFF: First, farmers are looking at budgets and which planted crops are going to allow them to generate the highest yield and income. Planting soy beans, for example, costs one-third to half of the expense to raise corn, so it can be more profitable and less risky for farmers to plant them. Soybeans are easier to grow and leads farmers to spend less money on fertilizers, chemicals, seeds, fuel and maybe even workers.
TESHOME: The downside of a crop planting decision like this is that it reduces spending from the agriculture industry and has an adverse effect on the rest of the economy.
GRAEFF: If we assume that China does increase their corn imports this year, then the Corn Belt (Iowa through Ohio) would be favorably impacted. This increased demand could boost profitability of corn production which may, to a degree, offset the fact that farmland value is decreasing.
On the other hand, regions that may see a decline include the southwestern states through California, as farmers are likely to experience negative effects from the drought, limiting the agricultural produce that normally comes from that region. As a result, we may see an increase in our produce and citrus prices across the U.S.
GRAEFF: The United States Environmental Protection Agency (EPA) continues to push forward directives that may lead farmers to reconsider the operations of their daily business. For example, the EPA is encouraging farmers to develop plans to control water runoff in areas such as the Chesapeake Bay, Ohio River Valley and other watersheds. There is also continued attention on water and air quality as well as soil erosion that farmers will have to pay attention to. These enhanced management practices can add costs for technology and labor.
However, there are some expenses offset due to limited application and things like cost of plant nutrients and pest control. Farmers are now looking at high-tech investments to continually adapt to the changing expectations of the industry and to preserve the resources that are vital to success. In some cases, investing in these high-tech and extremely efficient capital assets to be used long-term, such as precision fertilizing, may even translate to cost savings for operations due to the extreme level of efficiency they provide. This is the new world we live in.
Warren Graeff, who oversees PNC’s agricultural banking unit, grew up on and maintains ownership interest in his family’s farming business
Mekael Teshome, an economist for PNC’s regional markets, is helping to establish a non-profit university focused on agriculture and the environment in his birthplace, Ethiopia
Life on the Farm:
*Source: The American Farm Bureau Federation
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