It’s been at least a half-decade since US agriculture and downstream industries have faced this much danger so early in the year. In 2014, creditors dealing in the industry need to be aware that some long-term problems could be compounded by domestic weather and geopolitical strife, landing US agriculture firmly on the National Association of Credit Management’s Industries to Watch list.
A number of headwinds are in play against the agriculture industry. The Federal Reserve’s Beige Book economic roundup has documented ongoing drought conditions leading to poor crop yields in some areas while NACM Economist Christ Kuehl, PhD, noted a general reduction in the size of herds plus a serious virus that destroyed almost 10% of the usual pork production. This could lead to shortages in supply and higher prices once the large quantity of frozen product is used up.
Long-standing drought issues were joined by one of the most unpredictable winters in recent memory, which plagued many regions. Beige Book contacts noted in recent weeks that major weather-related crop damage was apparent in places like District 5 (Richmond) and District 6 (Chicago), among others. The Beige Book also found crop prices at a lower point in January 2014 than a year earlier for a number of products including corn, wheat and soybeans. There was some good news, though, in the form of improved soil conditions in the Southeast and, for producers, higher prices for cotton and rice. However, it seems there is significantly more negativity surrounding the industry than positives. Kuehl said issues facing the Ag industry have commodities analysts and other experts worried.
“This is shaping up to be the year when all the travails in the agricultural world start to catch up with the markets,” he warned. “There has been an unrelenting series of problems affecting farm output in the US as well as most of the rest of the world.” While some of the issues will result in higher food prices in stores, only so much can realistically be passed on before a change in buying habits and even deeper problems take hold.
All of that fails to even take into account the elephant in the room: potential energy price increases. In 2008, energy prices spiked due to crude oil exceeding $145 a barrel, Kuehl recalled. At the same time, food costs rose by 5.5%, resulting in a number of problems. He called the oil price volatility in 2014 somewhat less threatening, for now, but suggested recent escalating turmoil in the Middle East and Eastern Europe that has dominated the world news of late could easily spin further out of control at any time. If that occurs, the most likely scenario is quick and painful price spikes that the Ag industry is unprepared to handle at present.
- Brian Shappell, CBA, CICP, NACM staff writer