Color the Harvest Green

Rising ethanol production and strong sales abroad have many U.S. farmers singing "happy days are here again" -- and here to stay.

By Ed Maixner, Editor, The Kiplinger Agriculture Letter

October 31, 2007

U.S. agriculture is on a hot streak. And it'll last years as demand grows for farm products such as corn, wheat, soybeans, milk, meat and poultry and fresh produce, among others.

That spells big profits for farmers as well as for food processing plants. Scores of businesses that serve the agriculture sector are also benefiting, especially railroads, trucking and ports, as well as farm equipment makers and construction companies.

Meanwhile, ag sales are going through the roof. This year, they'll total $280 billion, an increase of 15% over 2006. Next year, they’ll easily top $300 billion.

Farm income will hit a record this year -- $87 billion net, up nearly 50% from 2006. Average crop prices are about 20% higher than last year and will rise as much in 2008. Prices for livestock are up 22% compared with a year ago, led by prices of poultry and dairy products.

Demand for farm goods will be sustained in coming years by a confluence of factors:

• The biofuels industry is shaping up as a huge customer of grains and oilseeds. About 25% of this fall's corn crop will be used to make ethanol. By 2015, ethanol production will require about 30% of each year's corn crop. And makers of biodiesel will soak up 20% of U.S. soybean oil next year.

• Developing nations are stepping up purchases of farm products. Rising incomes in many parts of the world, especially in Asia and Latin America, will hike demand for better-quality foods -- poultry and dairy items, in particular -- and U.S. farmers are eager suppliers. Note that Asia and Latin America together will add 700 million people by 2020, accelerating growth in an already expanding market.

• And with the North American Free Trade Agreement taking full effect on Jan. 1, farm trade will climb between the U.S. and its neighbors. In just a year, look for Mexico to buy $15 billion worth of U.S. farm products, up from $13 billion this year.

The brisk farm economy is a godsend for other industries.

Sales of large farm tractors and grain combines will jump at least 4% next year. The high-speed expansion in biofuels is creating a domino effect, says Charlie O'Brien, vice president for agricultural services of the Association of Equipment Manufacturers. It's creating high demand and high prices for major crops, "with the resulting increases in farm income ultimately equating to optimism around equipment sales."

The need for more corn storage has contractors scrambling to build grain bins. The record corn harvest in the Midwest is spawning a 10%-20% expansion of grain storage bins this year. One major grain bin building firm describes the pace of building as "feverish."

Construction firms are busy putting up new ethanol facilities, adding thousands of jobs -- and needed incomes -- to rural communities. There are currently 73 ethanol plants under construction in the U.S. Ethanol plant operators are also ordering many new railcars to haul ethanol from their facilities. Les Nelson, a spokesman for Aventine Renewable Energy Holdings Inc., a leading ethanol plant builder and operator, notes that 1500 railcars are needed for the 14 plants that Aventine serves.

Meanwhile, U.S. ports are straining to transport more farm commodities abroad. Between June 1 and now, wheat cargos have gone up two-thirds over the same period last year.

But consumers will pay more for some grocery items next year. Cereals and baked goods, for example, will rise about 5% because of higher grain prices as well as transportation and labor costs. Overall, food prices will rise 3% to 4% in 2008.

Acting Secretary of Agriculture Chuck Conner points out that about four-fifths of the price of groceries stems from processing, packaging, transportation, marketing and distribution costs. And he says that rising energy costs are doing more to increase food costs overall than farm production prices.

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