California Ag Outlook: 2012

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Article written by Vernon Crowder, Rabobank

When asked about the outlook for the ag and food sector in California, the answer is dependent upon the forecast for global growth, interest rates, the value of the U.S. dollar, and of course, weather.

Global Growth
Most forecasts of global growth project it to decline from 4 percent last year to 3.3 percent in 2012. Many of the European economies are slowing significantly and some will go through a "second dip." Economic growth in the U.S. is expected to improve, although at a moderate rate. Asian economic growth will moderate, but remain much higher than the global average. Hence, total ag and food exports may slow slightly, but domestic consumption should continue to improve, unless shortages of some products push their prices too high.

Interest Rates
The cost of funds in the U.S. is expected to remain at its current low level because the Fed does not want to forestall the moderate growth currently underway. Despite higher energy and food prices, overall inflation appears to still be manageable. Borrowing spreads will continue to be higher in many instances, reflecting the greater variance in financial conditions for some borrowers and their lenders as they focus on managing risks. In general, low interest rates will continue to offset other increases in input costs and help sustain recent appreciation of ag real estate.

The U.S. Dollar
As a result of moderate growth and low interest rates in the U.S., the American dollar will remain relatively weak, although stronger than most of 2011. It has recently appreciated as many investors were seeking "safer havens" as the financial turmoil in Europe increased yet, our dollar is not expected to return to historical values until economic growth and interest rates rise significantly in the U.S. As a result, U.S. ag and food products will remain relatively competitive this year for most importers.

Weather
Normal weather is likely, but significant deviations from the norm are problematic for ag producers. Weather outside of California and in other global areas is also important because of its potential impact on competing supplies for California producers. Last year’s weather in California was not good for some regions and some crops. While the abundance of rain helped provide good feed conditions and replenish surface and ground water supplies, it made agricultural practices difficult in some cases, delayed some planting and harvests, making crops vulnerable to early fall rains. There were also severe freeze conditions in coastal areas late in the spring, reducing yields. While precipitation levels are below normal so far this season, fortunately there are ample supplies in our reservoirs to avoid a reduction in planted acreage in 2012.

Clearly, the above forecast is only based upon probable expectations, and some are more limited than others, especially forecasts of weather. If 2012 is similar to last year, many ag producers and food manufacturers will again enjoy another profitable year. At the same time, lingering effects of the recent recession and ever increasing competition downstream in the "value chain" will undoubtedly result in some sea-changing challenges or opportunities for some at the farm and/or process level in California agriculture.

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