Exports: The Engine Driving Profitability

Exports: The Engine Driving Profitability

Ag exports will likely break another sales record this year

Everyone worries about softer commodity prices, but there's reason enough to be bullish – even without any more biofuel demand growth.

Since 2008, global demand expansion has greatly increased profitability for U.S. farmers. In 2003 just over 5 million acres of U.S. corn was exported to China; ten years later that figure had jumped to 27 million acres, according to Purdue University. The number of acres of U.S. soybeans sold to China jumped from 7.4 million to 20 million during the same decade.

Share of U.S. ag exports by destination.

It's part of a wider trend that has led to record exports the past several years. In 2010 we were astounded when U.S. ag exports jumped from $96 billion to $108 billion in annual sales. Last year that number came in at a record $141 billion. USDA's current 2014 forecast? Just under $143 billion.

Remarkable. In short, people want our food and we have a good system for getting it to them.

Some of the export growth the past five years has been to our closest neighbors (see chart). Mexico is one of the largest recipients of U.S. agricultural exports, including an average of 22.2 million metric tons of U.S. grains, oilseeds, and related products per year from 2008 to 2012.  The average annual value of those exports to Mexico is $7.3 billion.

Exporting is particularly important for agriculture since growth in demand for agricultural products in the coming decades is expected to come largely from developing countries. Two countries – China and India – hold 37% of the world's population. And both have huge upside potential to create more middle class consumers who desire animal protein.

Brazil remains America's greatest export competitor. It still has up to 250 million acres available for corn and soybean expansion. Brazilian farmers are double-cropping corn after soy at an increasing rate, in order to leverage land assets. But while the growth of grain (corn) is positive in Brazil, much of the production is 1,200 miles from port, says Rabobank economist Renato Rasmussen.

"It's become clear we can drastically increase production, but logistics remain the challenge," he adds.

China canceled numerous sales from Brazil last year when the South American country's ports were jammed and dysfunctional. Brazil has since seen the light and implemented an electronic system to make shipments work more smoothly.

No embargo, please

Foreign government policies – or should I say politics -- often cripple Ag exports. In 2010 a drought caused Russia, the world's second biggest wheat exporter, to ban wheat exports. Russian Prime Minister Vladimir Putin said the ban was necessary to prevent a run up in food prices.

When the U.S. faced an equally devastating drought in 2012, no such ban was even considered.

Later, food prices registered little change outside of normal inflation. In fact, according to USDA's Economic Research Service, retail food prices decreased slightly, on average, for the first six months of 2013. The largest price impacts of the 2012 drought occurred between June 2012 and June 2013, when poultry prices rose 5.5% and egg prices rose 6.9%.

Even with Russia's takeover of Crimea and other threats in the Black Sea region, no one has suggested grain embargo as a possible sanction. It would seem we learned our lesson from the Jimmy Carter grain embargo.

Some countries restrict exports, regardless of weather. Argentina has an export tax of 35% on soy and 20% on corn and wheat, and there are limits to how much corn and wheat can be exported, says Rabobank economist Paula Savanti.

Tax dollars encourage U.S. ag exports, to the dismay of competitors. More than 60 ag organizations received funding to assist in expanding commercial export markets for American products in 2014, USDA said on Wednesday.

The funding, authorized through the 2014 Farm Bill and awarded by the Foreign Agricultural Service, helps ag organizations develop relationships with foreign buyers.

According to USDA Secretary Tom Vilsack, every dollar invested in trade promotion provides $35 in economic benefits.

It's not just grain, either. The U.S. Meat Export Federation (USMEF) reports that in 2012, the China/Hong Kong region was the number-three market for U.S. pork exports, purchasing 431,145 metric tons (950 million lb.) valued at $886.2 million. China also has rapidly grown into one of the leading global markets for beef, but the country has remained closed to U.S. beef exports since the 2003 bovine spongiform encephalopathy finding in the U.S.

USMEF adds that U.S. beef, pork and lamb exports in 2012 amounted to more than 7.5 billion lb. of product valued at more than $11.8 billion. The export value per head processed equated to $55.87 for pork and $216.73 for beef.

Agriculture accounts for 10% of all U.S. exports despite comprising less than 5% of gross domestic product.

Barring another global economic meltdown, U.S. farmers are still in the driver's seat.

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