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It is hazardous to predict the future

Agriculture.com Staff 08/06/2008 @ 9:21am

In times like these, it is good to do a reality check.

We are being bombarded with prognostications that make major crop farmers smile and livestock farmers cringe.

The future that is being described is one of tight crop supplies and elevated prices. Crop agriculture, they tell us, is slated to finally move to the promised land of lucrative market-generated incomes (plus $5 billion in farm program direct payments).

And, livestock farmers' frowns are also projected to turn into smiles -- eventually. The current financial pain of livestock agriculture will fade as livestock numbers are sufficiently adjusted so higher livestock prices will more than cover higher feed costs.

This future is a very appealing place. So what is behind all this optimism?

Basically it's all about demand. Ethanol is, of course, part of the story.

Ethanol's appetite for grain-based feedstock has been a primary force in corn demand growth over the last two years, no question about that. And as U.S. land resources shifted to corn and away from soybeans and other crops, prices for other crops increased markedly as well.

So will ethanol sustain the long-term profitability of crop agriculture? Not really -- and it is only one of several factors that have influenced crop markets in the last two years. The ethanol effect will continue to be an influence on major crop agriculture for a few years, but then demand for grain-based ethanol will level off, no longer exceeding the growth in production.

Most of the optimism about long-run agricultural demand is based on anticipated changes on the international scene.

One of these changes is the increase in incomes in developing countries, especially China and India -- a growing middle class.

Another major anticipated change in the international arena is the successful completion of the Doha round of the World Trade Organization (WTO) negotiations. With the possible exception of the EU, each and every country seems to think that its agriculture will benefit from a successful Doha round as long as all other countries hold up their end of deal.

This is particularly true for the U.S. With the guarantee of market access, commodity groups, farm organizations, and the Administration are betting a large chunk of otherwise potential government payments that ever-increasing exports resulting from the growing Chinese and Indian middle classes will increase U.S. farm income and make those payments unnecessary.

In recent years, China and India's incomes have been growing -- often at double-digit pace. In fact, that income growth is typically given as an important reason for recent, as well as future, increases in commodity prices.

This winter -- at a commodity outlook meeting near you -- expect to see graphs showing recent income growth in China and India and graphs of U.S. exports of certain farm commodities to China.

Before turning to the long-run effect of China and India, let's consider their recent impact on U.S. agricultural demand. While China and India have experienced rapid income growth, trade data suggest that U.S. agriculture has benefited relatively little.

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