US agriculture is in the business of producing food and fuel for the domestic market, and exporting the surplus to the foreign markets. While that objective is noble, the global recession has cut into the demand for all three of those markets. And less demand means lower commodity prices and less farm income. No surprises there. But what you really want to know is when all of this fun will be over and we can get back to business.

The demand for agricultural commodities has been on the decline for a year now. Americans are avoiding high priced restaurants, and opting for lower priced food, when and if they venture away from home to eat. And grocery purchases are for even lower priced foods as well. With such a change in food demand, along with reduced travel that consumes biofuels, the demand for agricultural products has fallen says Jason Henderson, Vice President of the Federal Reserve Bank at Kansas City, in the August issue of the Iowa State Ag Decision Maker.

Henderson says Americans are not eating less, but they are eating more of lower priced foods in an effort to cut their food bill. That is a significant change in the past three years, which saw 4 to 8% increases in food expenditures above the prior year. For 2009, that began as a 2% decline from 2008. Such a change impacts meat purchases, replacing higher priced cuts with lesser priced meats, and even replacing meat with lower priced vegetables. That says beef is replaced by pork, which is replaced by poultry.

Not going out to eat at a fancy restaurant is one example of cutting back on discretionary driving, and as a result, less fuel is used, including ethanol. That puts a downward pressure on gasoline prices, which makes ethanol blending more expensive and reduces the overall production of ethanol. Economists say retail gas sales declined nearly 5% in 2008. This contributed to the idling of several ethanol plants and lower ethanol prices, which pushed down the price of corn. Since ethanol at $1.50 per gallon will support a $3.20 corn price, that means current lower ethanol prices are not willing to pay that much for corn. That impacts soybean and wheat prices which compete for acres.

Also falling sharply was export demand, despite the value of the dollar which last year provided US commodities to the global market at bargain basement prices. Henderson expects more export decline before a 2010 rebound and more of a rebound in 2011.

When food and fuel prices and lower exports resulted in 25% lower commodity prices, farmers responded with a lower demand for land and machinery, and a willingness to cut production outlays as much as 5%. Even with lower production costs, profitability will be down. But when will it all turn around? Henderson says, “After a global expansion of monetary and fiscal stimulus, current forecasts suggest an economic recovery in 2010. The farm rebound hinges on renewed strength in food and fuel consumption.” He says current forecasts point to some stabilization in the last half of 2009 and recovery in 2010. Henderson believes world economies will be on the same track, with a moderate rebound in 2010 forecast by the World Bank. Such a recovery would be dependent on increased restaurant sales and more consumption of higher valued meats, with strong demand for fuel pushing up gasoline prices and ethanol blending rates. Globally, higher caloric intake will be recorded in developing countries where a better economy quickly translates to better food consumption.

While a moderate recovery is anticipated in 2010 by USDA and the University of Missouri Food and Agricultural Policy Research Institute, they are not expecting farm incomes to return to 2008 levels for several years. That will be dependent upon the value of the dollar, and it is not expected to remain at the 2008 levels when export business was at its high water mark.

Summary:
The recession has taken the steam out of the farm economy by cutting food and fuel demand and dampening export trade. While some recovery is seen in the last half of 2009 and more so in 2010, the recovery may be more limited to domestic markets than global markets. Exports will recover, but not to 2008 levels until the dollar returns to its prior levels at the height of the boom.