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6 macroeconomic factors to watch
Avoiding the trap of tunnel vision in long-range strategic business and marketing plans is a perpetual challenge. It’s easy to focus only on U.S. weather conditions or on crop production issues in competing countries.
Michael Boehlje, Purdue University ag economist, urges farmers to broaden their world view. “There may be more factors shaping the industry that are happening outside the industry than within it,” he says.
Macroeconomics focuses on the performance, structure, behavior, and decision-making of national, regional, and global economies used by governments and large corporations to develop and to evaluate economic policy and business strategies.
Don’t overlook the following six factors in your business planning. Here’s a breakdown of how those factors could impact U.S. farm commodity markets.
1. The likelihood of higher short- and long-term interest rates and a stronger U.S. dollar. The Federal Reserve indicated earlier this year that it might begin to reduce its QE3/bond purchase program. To date, there’s been no move to increase the record-low short-term interest rates. Long-term interest rates are expected to rise gradually. Short-term variable-interest rates may be stable for one or two more years, says Jim Knuth, vice president, Farm Credit Services of America.
Look for two triggers:
Inflation rising above 2.5%.
Unemployment decreasing below 6.5%.
Keep a watchful eye on the next Federal Reserve meeting in December. The risks of tapering the stimulus program are twofold: tapering too quickly or too slowly.
Confirmation of a new Federal Reserve chair, Janet Yellen, is a safe bet, and Yellen, the current vice chair, is expected to stay the course.
2. The overall health of the global economy. The growth of the global economy will average 2.9% in 2013, down from 3.2% in 2012. The International Monetary Fund forecasts it will rise to 3.6% in 2014. In 2014, the U.S. is projected to expand to 2.5%; Europe to 1%; Japan, 1.25%; and China, 7.25% (down from 7.50%).
Economies in the Middle East and North Africa, Afghanistan, and Pakistan region will struggle because of political instability.
3. China’s economic outlook. A report, China 2030, by The World Bank and Chinese think tank, states the economy will slow between 2011 and 2030 to an average growth rate of 6.6%, compared to an average of 10% in the previous 30 years. By 2025, growth will decline to an annual average of 5%.
China’s population is projected to peak some time between 2025 and 2030, and then it will begin a slow decline.
“Those who only look at Chinese GDP growth percentage as a proxy of commodity demand are missing the big picture,” says Kevin Roepke, manager of global trade, U.S. Grains Council. “That’s because 7.5% growth on an $8.2 trillion economy equates to more than $600 billion a year. Compare that to 10% growth on a $5 trillion economy and that’s $500 billion a year.
“When you discuss commodities as a whole, you have to separate staple commodities from luxury commodities,” he says. “With rising incomes in China, meat and feed grains are moving into that staple commodity arena and out of luxuries.”
4. The outcome of European elections and the political stability of EU leadership. In European elections, Angela Merkel won a third term as German chancellor, maintaining stability in the strongest EU country. She is forming a government with a new coalition partner, the center left Social Democrats. The EU bailout is unpopular, but Merkel argued to impose austerity measures, and she won credit for keeping Germany above the fray. She faces an overhaul of the federal fiscal system, as well as energy-related initiatives.
“Germany doesn’t have enough economic growth to pull the rest of the EU out of recession,” Boehlje says. “What she does to bail out the EU will be key.”
5. The financial crisis in EU countries. Europe’s economy is improving, but it still suffers from historically high unemployment and heavy government debt. An Associated Press survey of more than two dozen private, corporate, and academic economists suggests that the 17 nations using the euro will grow at an annual rate just above 1% in the second half of 2013 and in 2014.
“A financial crisis in Europe puts sovereign debt under pressure,” Boehlje says. “The vast majority is held by a few commercial banks.”
This would impact U.S. exports. “A total of 25% of Chinese exports go to Europe,” he says. “If Europe makes fewer purchases from China, this slows China’s economic growth, and that has profound implications for our exports.”
6. Long-term global demand. After two decades of stagnation, Japan is growing. Following a 3.8 % growth rate from April through June, it will slow to 2.2% next year. An aging population, along with unwinding of fiscal stimulus and consumption tax hikes, is impeding growth. “Long-term demand for food, feed, fiber, and energy appears bullish,” Boeljhe says. “Long-term drivers are encouraging, but the path to the future will be volatile.”