Agricultural Trends

March 29, 2024

Global Economic Watchlist

By: Dr. Dave Kohl

The fortunes of the agriculture industry often revolve around the dynamics of the global marketplace. For many agriculture commodities and industries, export markets are critical for profitable businesses. Even producers who do not directly market their products offshore will have their businesses and industries influenced through costs, expenses, and to some extent, interest rates. In 2024 and beyond the quarter-century mark, managing trends and disruptions will be a high priority when conducting strategic planning for operations.

This year, over half of the global population will be impacted by major elections in various countries. The election outcomes in Mexico and India will be critical to agriculture. Certain elections that have already occurred or are predetermined, such as in Taiwan and Russia, can impact the agriculture commodity negotiations and possible tariffs and sanctions. Of course, the ongoing wars and other potential conflicts can change outcomes in a New York minute.

China

The second largest economy, and now the second largest country demographically, is in a period of economic and societal struggle. China, which over a decade ago was the main driver of the great commodity super cycle that brought record prices for many commodities, is now in a protracted period of sluggish growth.

China’s one-child policy, in place for over 35 years, is now resulting in a longer-term economic slowdown. China's population has more people over 60 years of age than any other age group. If you were to segment the Chinese population over 60 years old, it would rank as the fifth most populated country in the world. Their aging population and fewer individuals who are of childbearing age and forming households are resulting in sluggish spending and investment patterns. The unemployment rate of youth from 20 to 30 years of age is officially 14%, but some insiders indicate that it is over 20%. Many of these individuals have technical and college degrees; however, the government crackdown on the technology sector is resulting in less investment and fewer opportunities for this age group.

Next, fewer countries and consumers globally are purchasing or investing in Chinese goods and services. Manufacturing exports, which make up nearly 30% of the Chinese economy, are down over 14%. However, exports to the U.S. and Europe are down over 40% which puts pressure on businesses and household incomes in China.

China has a housing crisis similar to the real estate situation experienced during the Great Recession in the United States. Real estate values are down over 50% in some areas. Chinese citizens are pre-paying mortgages and forgoing consumption of products and services, which is hindering the economy.

China, along with many global brethren, has a debt crisis. Debt to gross domestic product (GDP) is at record levels. Next, their loans on infrastructure as a result of the Belt and Road Initiative, which invested $1.3 trillion in over 70 countries, have high levels of payments that are in arrears.

China is one of our top agricultural trading partners, but their growth will most likely be less than 5% annually compared to the double-digit growth experienced in the previous decades. Commodities such as cotton, milk, pork and soybeans will feel pricing pressures as a result. On a positive note, energy costs globally are down at least 20% to 25% from 2022 highs as a result of China’s slow economic growth because they utilize nearly 15% of the global consumption of oil and energy. The careful monitoring of deflationary trends in China will be a high priority to determine if it will expand globally.

India

India is now the world's most populous nation, and their economic growth continues. India just surpassed Great Britain as the fifth-largest economy globally and will likely exceed Germany by the end of the decade as the third-largest economy. It appears that the upcoming election results will favor the political leader who has been in office and supported the agricultural economic policy of protectionism. This political-economic strategy ensures that India provides agricultural products to its population before exporting. This is critical as India historically has been a large exporter of rice, sugar, onions and wheat. This will impact countries dependent on rice and sugar imports and can influence global prices.

Next, 55% of India's population are subsistence producers that are heavily subsidized. Thus, farm policy and protectionism status in India and its impact on the growing populations of Southeast Asia will be critical to agriculture industries that are direct competitors.

Europe

The European economy is walking on an economic tightrope. Germany, the third-largest economy in the world, has negative growth and is in a recession. Great Britain and the rest of Europe are struggling with inflation, and they collectively have an economic growth rate of one-tenth of 1%. Unity in Europe may be impacted by these economic pressures and political support for the conflicts in Ukraine and the Middle East.

Immigration issues, along with climate and social unrest, are impacting Europe's agriculture industry. Greenlash, or the resistance to the green energy movement, is now front and center with the agriculture industry. Protests in France, Germany, Spain, Italy and the Netherlands, where farmers have public support for the agriculture industry, will be a windshield trend to closely monitor in the United States. Last year's elections in the Netherlands that favored public support for farmers could foreshadow worldwide events.

Southern Hemisphere

The 800-pound gorilla in the global agricultural competition is now in the Southern Hemisphere. Brazil is leading the group in increased production of crops and, to some extent, proteins. Brazil has added cropland the equivalent of one half the area of the state of Illinois by converting grassland to cropland. This extra production capacity could continue for the next several years. The Belt and Road Initiative is a long-term investment of $1.3 trillion in the Southern Hemisphere that will eventually provide the necessary infrastructure for trade, resulting in direct trade with these countries from China and the Asian region. This could result in North American producers becoming the second supplier in line if the Southern Hemisphere can meet the needs. If the Southern Hemisphere cannot provide the supplies, then the reserves will likely come from the Northern Hemisphere.

In conclusion, these global economic views will create periods of extreme economic volatility and profit margin shifts that occur rapidly. A strategic manager in the agriculture industry must watch global weather patterns, supplies, and both the cost of transportation and distribution. Within this context, prudent financial and business practices that result in resiliency, agility and nimbleness will be important. A focus on managing the controllable variables and managing around the aforementioned uncontrollable variables will be critical in directing business energy.