New Markets, From the Ground Up

By Dennis Boone

Agriculture is often overlooked as a key driver of the regional economy, but throughout a long national downturn, money has poured into that sector—and global conditions hint of more coming.

Imagine you’re in the food business. Now imagine a new market—2 billion people strong over the next 35 years, who need what you produce. How are you feeling about your long-term prospects for growth?

If you’re Chad Bontrager, assistant secretary of agriculture for the state of Kansas, you feel pretty good. “The current state of agriculture in Kansas? I think it’s in a very good place,” Bontrager says. “Roughly 98 percent of our customers are outside the state of Kansas, and 94 percent are outside of the U.S. We’re already sending a tremendous amount of grain and beef around the world.”

That world will see its population soar to 9 billion by 2050, if current projections hold up.

Like Kansas, Missouri is taking advantage of that demographic sweep, as well. Combined, the two states generate agricultural product sales worth more than $22 billion annually, according to the United States Department of Agriculture. Kansas’ share of that tops $14.5 billion; Missouri’s is $7.4 billion. In an age where much of the business and policy discussion is driven by forces from and agendas set in urban areas focused on emerging sectors like life sciences or information technology, those figures are powerful reminders of how closely linked the two states remain to the economic bases they had at their founding.

“Agriculture is almost continually overlooked,” in that context, said Bill Watson, president of UMB Agricultural Division. “People sometimes ignore the obvious, but people eat—and at very, very cheap prices compared to the rest of the world— so it’s often taken for granted in America.”

One of the overlooked business stories of the 21st century has been the depth of global change in economic status. The remarkable run of double-digit increases in GDP for both China and India has elevated hundreds of millions of out of grinding poverty and into a nascent middle
class, one with—literally—an appetite for new things.“As the global population grows and diets change and move away from basic grains like
rice or cassava root or sorghum, into protein consumption with meat, poultry and dairy, the good news is we have a lot of Kansas beef and dairy products to sell to folks,” said Bontrager. “We grow a lot of the grain to feed the animals that produce the meat and dairy products. We’re very well-positioned to supply that market and reap the advantages of it.”

Against that backdrop is a regional farm economy that has been infused with new economic strength, driven in recent years by two factors: high commodity prices, and a
remarkable string of quarterly increases in ag land prices—for irrigated land, dry land and ranchland. Commodity prices have retreated this year after a spike in 2012, but farmers are better off today than they’ve been in years.

With their balance sheets shored up—“Significantly more liquid than they’ve been in the last 20 years,” Watson says—many farmers have been able to buy additional acreage and
new equipment, creating new economies of scale and adding more efficiencies to their operations.

“We pulled the numbers from Kansas City Federal Reserve Bank on increasing land price over the past 10 years, and for a theoretical 1-acre piece of land in 2002, the value as of this past June, $3,955, was almost a four-fold increase,” Watson said. Over the course of a 40-quarter period, only once did prices not increase, and that was in the fall of 2009, at the end of the Great Recession.

Much of that upward trend line, he noted, has tracked with increases in commodity prices. This stands to reason: As a property’s potential to generate financial yield rises, so too does the underlying value of the land. But in 2010, he said, “commodity prices for everything were going berserk,” and 2012 provided an encore, thanks in large part to lingering drought across the Midwest. Farmers that were fortunate enough to produce a yield benefited immensely.

But not all enjoyed that luck.

“One of the things we experienced in Kansas that kind of held us back from other parts of country is the extreme drought going on,” said Bontrager. As much as that hurt the crop production side, it wracked the protein chain, as well: “It limited crop production and the size of the beef herd, and kept us from taking full advantage of high commodity prices,” he said.

Of course, elements of Newton’s law apply in ag economics as in most other places. The reaction to rising values hasn’t been equal and opposite, but it’s been evident, said Ernie Goss, an economist with Creighton University. “For some, it’s meant property taxes have gone up fairly dramatically,” Goss said. “Property taxes tend to ratchet up easily, but it’s hard for them to come down, so if you get into problems, you have issues there.”

Because Goss has seen no evidence of a spike in borrowing through the region’s banks, it’s likely that farmers are indeed tapping into their newfound equity. The pace of increasing land prices has slowed, he noted, and overall, “I wouldn’t say prices are dangerously high, but some areas are primed for problems.” That’s particularly true given the impact of the recent decline in commodity prices, he said: “It’s getting to the point where farmers are at break-even with prices where they are now.”

Longer-term, two issues bear watching on the farming landscape: One, the average age of a farmer in the U.S. is now 57, and the wave of looming retirements—combined with a dearth of next-generation farmers to carry on the family tradition—suggests there may be additional fuel in the coming years for a longstanding trend toward increasing farm sizes.

“They’re getting much, much bigger,” said Watson. In lockstep with that, he said, ag technology—everything from use of GPS systems to variable applications for fertilizer and irrigation on large farms—“cuts their incremental input costs and expense of crop production.” A bigger-is-better mindset, he said, compels large farms to get even bigger, sustaining the demand that contributes to high land prices.

The other, Watson said, ties back to those changing appetites in what used to be considered the Third World. “That’s a perfect storm for land prices: Hundreds of millions of people in Asia eating animal protein once a week instead of two times a year. All those pigs, chickens and cattle raised on grain, that’s going to continue, and ethanol remains a huge player in the corn market. We still haven’t faced the real dilemma of obtaining both food and energy from the same crop source.”

A final hurdle they noted has been set up by the policy sector, with delays in getting a new farm bill approved. The House and Senate began negotiating again this month over spending levels for the food-stamp program that now accounts for most of that measure’s annual outlays. The delay, Goss said, “creates uncertainty; getting that passed is vital.” But as heat is brought to bear on the food-stamp issue, he said, it’s also on the ag aspects of the bill. “At least from D.C., there is pressure on ag subsidies,” Goss said. “And with the financial situation the country is in, there’s not as much money to spend.”

Still, the long-term outlook for agriculture—and its role in the regional economy—“is very positive. Government is going to be less of a factor and demand is going to be
more of a factor. In terms of overall proportion of income, there will be less from D.C. and more from China.”