Asian factor affects world trade equation

20 February 1998

Asian factor affects world trade equation

Delegates at this years Oxford Farming Conference gained

an impression of bullish optimism among US farmers under

the new Freedom to Farm regime. That may be true, but

faltering export markets, weather problems and stagnant

prices are making life less than comfortable, says

Illinois-based ag commentator Alan Guebert (below)

COMING off a year when farm income nationwide fell by 9%, American farmers now face 1998. Already, however, it holds limited prospects. Consider what US farmers encountered in this years first month:

&#8226 A stumbling export market crippled by faltering Asian economies.

&#8226 Signs that El Nino, the freakish weather phenomenon, may hamper 1998 US crops.

&#8226 Record 1998 pork production.

&#8226 Stagnant prices and enormous inventories of unsold 1997 grain.

&#8226 A forecasted record South American soya bean crop.

How do American farmers handle so much uncertainty so early in the new year? "We pray a lot," one Minnesota farmer said recently. He wasnt joking.

The biggest problem facing US farmers this winter is the economic chaos ricocheting throughout the Asian ag export market. For America, the Asian market isnt just important; its vitally important.

In 1996, Pacific Rim countries gobbled up 43% of that years record £37bn in US ag exports, or a staggering £16bn. Even more stunning is that two out of every three dollars of farm production from the nations bread basket, the Midwestern US, is exported to Asia.

If broken down by country, the picture gets very dark very fast. Japan bought £7.3bn of US food in 1996, or 20% of all ag exports. By contrast, Europe purchased only 15% of American food exports in 1996.

South Korea, essentially bankrupt already, bought nearly £2.5bn, or 6%, of 1996 US ag exports.

Then theres the ASEAN countries – the Philippines, Malaysia, Indonesia, and Thailand – which have been hit hardest by the Asian flu. The four bought £2bn of US food in 1996. While modest relative to Japan, ASEAN accounted for 10% of all US farm sales growth since 1990.

Predicting just how badly US ag sales to Asia may be stung in 1998 is very difficult, suggests Michael Dwyer, an Asia specialist at the US Department of Agriculture.

"There are so many unknowns, that exact effects are nearly impossible to predict," notes Mr Dwyer. But, he explains in a hopeful tone, "If the Asian economies can show 2% growth, US ag exports may stagnate, not collapse."

Indeed, USDA is hopeful. Currently it suggests 1998 US ag exports will fall just £300m worldwide. That prediction seems optimistic: Already the value of US maize exports for the first three months of the marketing year are £185m below the same period a year ago, largely because of flagging Asian sales.

Part of USDAs projection relies on a change in the export mix. In the past three years, Asia has tilted heavily toward processed food and red meat and away from bulk goods like maize and soya beans. If it returns to its old buying pattern – more bulk goods and fewer processed goods – total dollar sales to Asian countries may not decline at all, Mr Dwyer speculates.

But confounding that analysis is the dollars rising value. The dollar is now more expensive relative to the Australian and Canadian dollar and many European currencies, making it cheaper for US customers to buy wheat and other commodities like beef from American competitors.

"Bottom line," offers Mr Dwyer, "is the Asian ag export market will likely shrink and it is fair to say that our competitors have an advantage in getting a bigger slice of it. "But," he adds, "trying to put a dollar value on it simply cannot be done yet."

American farmers can put a value on it and that value is steadily eroding. Since last falls harvest, the price farmers are paid for maize has slowly dropped from £72 to £60/t. For soya beans, the decline has been from £165 to £150/t.

Wheat has had a seven-month slide. In July 1997, wheats price was a thin £90/t. Today it is an even thinner £74.

American wheat farmers have taken notice and planted – as permitted under Freedom to Farm – less wheat last fall. On Jan 12, USDA estimated US hard, red winter wheat seedings now stand at 19m ha (47m acres), the lowest since 1972.

But the smaller plantings may not lift prices. Worldwide 1998 wheat production will top 608m tonnes, guesses USDA, up from 604m tonnes last year. Bothersome, too, is what those now barren American wheat acres will grow this year. Market analysts predict states like Kansas, the nations biggest winter wheat producer, will see 1998 maize and soya bean plantings increase by more than 400,000ha (1m acres) as farmers shift away from wheat.

That shift may nip the incomes of Midwestern farmers, who grow the lions share of US maize and soya beans. Some forecasters already are lowering 1998 price estimates for both crops in anticipation of expanded plantings, good weather, and ailing export markets.

The soya bean outlook has another problem. Brazilian production is expected to top 30m tonnes for the first time in history. That equates to 42% of last years record US production.

Given this years already sleepy soya bean prices, the enormous Brazilian crop just 10 weeks from harvest and an economically ailing Asia, can US farmers find any good news on the horizon?

Certainly, but even the good news this mild winter carries some dark clouds. The good news, at least to USDA, is that current maize carryover will be a less-than-oppressive 380m tonnes, down 50m tonnes from Decembers estimate.

The cut in maize carryover – and here come the dark clouds – is based on increased livestock feeding. The government now predicts US pork production will expand by a very fat 7% in 1998. The increased output means American pork producers will operate at a loss for part of the coming year just as US beef producers did for most of 1997.

USDA, despite its recent hopeful tone, is more cautious in predicting 1998 US farm income: It predicts US farm income will be flat compared with that of a year ago.

But as one Illinois farmer said recently, "That sounds like a real prayer to me."

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