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Economic downturn has various implications for agriculture

By Renae B. Vander Schaaf

Date Modified: 04/11/2013 9:08 AM

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SIOUX FALLS, S.D. — Michael Swanson, PhD, who works for Wells Fargo, talked during last week's Central Plains Dairy Expo.

Swanson said producers can anticipate cycles from past experience.

Using the example of livestock, corn, ethanol and global grain, he showed how separate systems affect each other. Drought affects the corn yield, which in turn affects the other systems. An economic downturn in the general economy changes things.

"In this philosophy of systems, we must play the game of anticipation and strategic management. Farming is big business. Eighty-five percent of full service restaurants have less than one million dollars in assets. It is not uncommon for a grain farmer to have five million dollars invested in assets."

A difference exists between risks and uncertainties. Risks include weather, input prices and milk prices. Some risk can be managed through insurance plans, purchasing and selling and future contracts.

Uncertainties are a bigger problem, he said. Policies, whether it be ethanol, fiscal, monetary or global trade, are enacted by people. People can do unpredictable things.

"The country is not growing as it used to," he said. "GDP growth factors include capital investment and hours worked and numbers of people in the workforce."

Businesses grow the same way a country does with labor, capital and productivity.

The CBO forecast shows limited growth for the next decade.

Looking at data from the last 60 years, Swanson said less money is being invested in this country. The theory is that there are better opportunities overseas. Regulations and increased taxation are suppressing investment.

Wages haven't kept up with inflation. Less income and higher gasoline prices are causing people to drive less or purchase fuel efficient vehicles.

All of this has implications for agriculture.

The Federal Reserve only has cheap money to offer as a solution. Low interest rates are aimed at home buyers, but affect everyone, he said.

China is a major importer of agriculture and forestry products. They are willing to pay the higher prices for bulk commodities which is real proof they are in the market to import, he said. The flip side to that is they have leverage. The dairy industry remembers 2009, when a slight downturn in exports caused a major setback.

"I'm not that bearish on the United States economy," said Swanson. "Agriculture, energy and even manufacturing are bright spots. Crude oil production continues to rise and that makes a huge difference."

Things change and producers need to be ready, he said. Dairy is in a better spot than beef. If corn prices fall, the poultry industry will benefit within three months, pork 15 months, dairy 26 months and beef, 38 months.