In agriculture, record profits usually are fleeting; farm booms historically are followed by farm busts. The recent rebound in agriculture's profitability combined with projections of burgeoning global demand for food, fiber, and fuel suggest the industry has entered a new "golden era." Still, the glint of banner profits in agriculture could turn out to be fool's gold. While many in agriculture have enjoyed booming profits in recent years, market risks also have soared amid high and volatile commodity prices.
On July 19 and 20, 2011, almost 200 agricultural finance and business leaders examined the threats to agriculture's ability to maintain its recent profitability at the Federal Reserve Bank of Kansas City's symposium, "Recognizing Risk in Global Agriculture." The symposium in Kansas City began with a discussion of the risks agriculture faces in regard to food and fuel. Participants then explored the financial health of the agricultural sector and its ability to weather unexpected downturns in profits. Finally, the discussion addressed how agriculture was managing risks in a profitable, but highly volatile environment. Despite elevated risks, participants were cautiously optimistic that agriculture can avoid the history of past farm busts by applying the lessons learned from past boom/bust cycles.
I. BALANCING GLOBAL FOOD CONSUMPTION AND PRODUCTION
Food remains the fundamental product of agriculture. With global populations and incomes on the rise, the sharp increase in global food demand has helped spark bigger profits for agriculture. Yet, new technologies could intensify the competition in agricultural markets and rebalance global food consumption and production.
In recent years, expanding appetites for food have strained global supplies. As noted by U.S. Senator Pat Roberts of Kansas in a video welcome, agriculture's greatest challenge is the ability to produce the food necessary to satisfy global needs. In discussing this challenge, Joseph Glauber, chief economist at the U.S. Department of Agriculture, described how rising food demand in emerging nations has transformed global agricultural trade. In particular, China now is the leading destination for U.S. agricultural goods. Unlike the nation's other major trade partners, China purchases more bulk grains for livestock feed than processed foods.
While China presents opportunities, Glauber and other conference speakers also identified China as a primary demand risk for U.S. agriculture. Though rising incomes are expected to drive further expansions in Chinese markets, disruptions from either a slower economy or trade restrictions are a perennial risk to U.S. agricultural exports to China. The expansion of China's middle class also could shift the composition of U.S. exports away from bulk commodities for livestock feed toward consumer food products.
In addition to demand-side risks, future U.S. agricultural profits could retreat in the face of global food production. In agriculture, the best cure for high prices is high prices. Farmers quickly respond to rising prices by boosting production, which then trims future prices and profits. Glauber noted that by adopting new technologies and agronomic practices, nations in other areas, such as South America, Eastern Europe, Asia, and Australia, are enhancing their production capabilities, and challenging the competitiveness of U.S. agriculture. The adoption of advanced agricultural technology through plant breeding, enhanced agronomic practices, and new biological traits promises to boost global agricultural production. David Fischhoff, vice president of Technology, Strategy, and Development at Monsanto, suggested that crop yields could double by 2030 and satiate global food appetites.
Yet to achieve these yield potentials, Fischhoff said additional action is required, including a strong partnership of researchers in the private and public sectors. He also said additional private and public sector investments are needed to develop the location-specific technologies essential for satisfying the increasingly diverse palates of global consumers. …