Agribusiness

Production, distribution, and processing activities along the food supply chain up to the point of retail sale are all part of the agribusiness sector. Meat processors and grain merchants, as well as agricultural equipment manufacturers and individual farmers, are all part of the sector. Large multinational corporations have gotten more engaged in agriculture as the sector grows and diversifies.

However, the business has faced a number of issues, including low and fluctuating agricultural prices, growing trade tensions with China, growing levels of farm debt, and farm bankruptcy, all of which have harmed sector revenue and profit growth. As agricultural prices grow, industry income has increased by an annualized 0.4 percent to $2.7 trillion during the five years through 2021, including a gain of 1.8 percent in 2021 alone.

Weakness in agricultural prices throughout the Agriculture sector is to blame for the industry’s poor performance, with the agricultural price index (API) demonstrating substantial volatility over time. Industry farmers were shut out of price growth that occurred downstream of the supply chain in 2020 as a result of surging consumer and retail demand for food and food products as a result of supply chain breakdowns caused by the shutdown and limited operation of businesses, including limited wholesale driver capacity and processing plant capacity, as a result of efforts to contain the COVID-19 (coronavirus).

As a result, agricultural commodities piled up, and farmgate prices diverged from wholesale and processing prices. Because those enterprises were operating at capacity limits in the face of such high retail demand, their output prices actually grew, while farmers’ prices decreased. Despite the API’s great growth in 2020, the sector is still in decline as a result of these trends.

Over the five years leading up to 2026, industry revenue is predicted to rise by 0.6 percent annually to $2.8 trillion. The agricultural price index is expected to increase by 0.9 percent on an annualized basis for the same time period, benefiting the sector. As demand spikes from the coronavirus subside, rising prices will likely boost income and returns at the farm gate, which will then revert to normal.

Finally, the sector is predicted to face headwinds from the trade war with China and the lingering impacts of the coronavirus outbreak, both of which are predicted to stifle global economic development. Overall, things are likely to improve in the future, though to a limited degree.

The agribusiness industry is one of the most important and diversified sectors of the US economy. Agricultural producers and wholesalers, food makers and distributors, as well as ancillary businesses including crop and animal support services, agricultural equipment production, and scientific consultants, are all included.

In general, the industry entails the production of agricultural products, their transformation into edible commodities, and their distribution to consumers. This sector, on the other hand, does not keep track of agribusiness at the retail level.

The agricultural price index API, being a vital aspect of the US economy, sees revenue growth that varies with the entire economy, but also closely tracks variations in the agricultural pricing index API. Despite improving economic circumstances, revenue growth in the agricultural production subsector has been stifled in the five years leading up to 2021.

Overall, agricultural commodity price swings will set the tone for overall industry success since they determine farmer returns and wholesaler and processor costs. Finally, since these prices reverberate across the supply chain, changes in the API tend to set the pattern for industry revenue growth.

The agricultural production sector has shown significant symptoms of deterioration. Farm revenues, for example, have fallen due to low agricultural commodity prices, while farm debt and bankruptcies have increased as a consequence of trade tensions with China and the coronavirus outbreak.

Many farmers have reduced the number of acres they plant in an attempt to increase price appreciation. Despite the drop in total acres planted, crop efficiency advancements have resulted in an increase in harvest numbers. Overproduction has caused price decreases even further.

Furthermore, the coronavirus pandemic has had a severe influence on the agriculture producing industry. While the API indicates the largest growth for the time in 2020, sector farmers faced the pain of the coronavirus epidemic, while wholesalers and processors had excellent income gains. This is because, as a consequence of labor shortages and facility closures, there was a general lack of capacity to transport and process agricultural commodities, causing agricultural commodities to pile up at the farm gate.

Farmers saw their prices drop as end supplies increased. Retailers, on the other hand, started making bigger and more frequent orders to wholesalers and processors while restaurants were temporarily shuttered and so many customers rushed to the grocery store in a panic purchasing frenzy.

Market pressures forced them to boost their pricing due to their limited capacity and the large number of orders they received. During the epidemic, meat processors, in particular, have thrived, capitalizing on high demand and restricted supply.

Industry income fell again in 2020 as a consequence of higher processing prices but dropping prices at the farm gate. Government payments accounted for the greatest percentage of agricultural revenue ever recorded, with levels above 50.0 percent of overall agricultural revenue, according to the US Department of Agriculture. In reality, according to the USDA, agricultural debt has increased while agricultural equity has decreased.

Indeed, agricultural bankruptcies increased in 2020, after a year-over-year increase in 2018. Farm bankruptcies in Minnesota, Montana, North and South Dakota, and Wisconsin have more than quadrupled in the last five years, according to statistics from the Federal Reserve Bank of Minneapolis released in 2018. In Arkansas, Missouri, and Iowa, they climbed by 45.0 percent in only one year (latest data available).

This is problematic since the pandemic has weakened operational circumstances at the farm gate, resulting in a smaller total amount of cattle and products produced at a permanently higher price level in the long term. As costs grow at the wholesale and processing levels, this hurts the whole agriculture sector and supply chain, leading to price increases at the retail level and higher prices paid by consumers.

Low agricultural prices have had a flow-through impact as a consequence of these developments, restricting industry revenue growth at every step in the supply chain, while price increase at the processing level was insufficient to offset raw material price losses. As a result, revenue growth in the business has remained flat, growing at 0.4 percent per year on average to $2.7 trillion during the five years to 2021, including a 1.8 percent gain in 2021 alone as agricultural prices rise.

Food processors and manufacturers have attempted to protect themselves against fluctuating input costs. Vertical integration, in which one operator is active across numerous links of the supply chain, thus becoming its own upstream supplier or downstream customer, is a frequent means of doing this.

Contract farming, in which a farmer sells a specified amount of a product at a specified price, has also grown in popularity among larger organizations. Farmers have gravitated to this strategy because it assures a fixed amount of return on their effort, regardless of market volatility, in a climate of diminishing farm incomes, dropping net cash earnings, growing debt, and shrinking farm equity.

Wholesaling serves as the last link in the supply chain, serving as a go-between for farmers and food producers. Farmers and food producers, on the other hand, have started conducting business directly with one another.

This tendency has accelerated in recent years, owing to cost-cutting efforts and the growing presence of consolidated manufacturer sales branches and offices (MSBOs). MSBOs function as a company’s internal distribution network, essentially removing the need for third-party distributors. Because it is symptomatic of a failing wholesale sector in general, the situation has not been limited to the agribusiness industry.

The activity and presence of huge multinational firms in farming and agricultural companies have expanded throughout the five years leading up to 2021. Businesses have vertically integrated throughout the supply chain as a result of increasing corporate participation, controlling everything from agriculture and processing factories to wholesaling and transportation activities.

However, significant vertically integrated corporations are moving away from the production level of this business as a consequence of tumultuous circumstances, as indicated by JBS USA Holdings Inc. selling off its beef production assets, Five Rivers Cattle. Vertical integration and other cost-cutting techniques have had a favorable impact on industry profitability.

However, owing to divergent circumstances between farmers and processors, weakening in the supply chain as a consequence of the pandemic is likely to lead margins to decrease somewhat in 2021. Because of these steps, industry profit, as defined by profits before interest and taxes, is only expected to decrease to 3.5 percent of sales in 2021, down from 3.8 percent in 2016.

Due to cost-cutting efforts and an unpredictable operating climate, several failing operators have been compelled to depart the market, limiting the number of new businesses that may enter.

Over the five years leading up to 2021, the number of industrial establishments has remained constant at 2.7 million, with a yearly growth rate of just 0.3 percent. However, the need for necessarily trained workers has pushed up industrial salaries, which have increased by an annualized 2.2 percent to $299.5 billion, affecting profit margins.

The United States will have free trade agreements (FTAs) with 20 nations by 2021. The US government is also negotiating free trade agreements with 14 additional countries or organizations, including the European Union, Indonesia, the United Arab Emirates, and the South African Customs Union.

These accords, when combined with existing FTAs like the United States-Mexico-Canada Agreement (USMCA), which replaced NAFTA, help to expand US markets and discourage the employment of protectionist measures.

Overall industrial trade has increased as a consequence of the USMCA in particular. However, in recent years, the tremendous appreciation of the US currency has reduced the competitiveness of US agricultural exports on the worldwide market.

Furthermore, as a consequence of the coronavirus, worldwide trade activity has slowed, causing local end inventories of agricultural commodities to accumulate, compounding price decreases induced by market distortions. The long-term repercussions of the trade interruption are anticipated to take a few years to become measured, therefore the total impacts of the disruption remain unknown. Overall, if these adverse circumstances persist, the projected long-term impact would most likely be less local output and increased consumer costs.

This sector is projected to be impacted by the current trade issues with China. China has largely imposed tariffs on a number of agricultural and processed commodities shipped from the United States. China’s placement of a 45.0 percent import tax on US soybeans is the most concerning development for the business. Soybeans make up almost all of the US agricultural trade surplus with China, accounting for about 80% of the total.

While the countries agreed to hold exploratory negotiations to address the disagreement, the worldwide coronavirus epidemic derailed the agreement. Despite the tight global market, China increased its imports of US agricultural goods in 2020, though only little and still far below pre-pandemic levels. Overall, industrial exports fell by 0.7 percent on an annualized basis to $152.3 billion.

Industry imports, on the other hand, have increased by 1.5 percent on an annual basis to $150.9 billion, owing to their price competitiveness with locally produced goods. Furthermore, the United States imports a large amount of lower-quality product animals from Mexico, which is subsequently sold to the processing industry.

Income for the Agribusiness sector is predicted to increase somewhat over the next five years, as increased farm gate prices allow revenue to climb across the supply chain. The need for industrial goods is expected to remain strong due to sustained demand for food from emerging nations and limited assistance for biofuel development.

Over the next five years, food wholesalers are predicted to remain the industry’s biggest product group, but their revenue share is predicted to drop as downstream retailers continue to avoid wholesalers in order to achieve lower food costs.

As the advantages of vertical integration attract more investment, multinational businesses’ position in agriculture is anticipated to grow. Increased automation and better scientific procedures, such as genetic modification (GM), will almost certainly allow more and bigger farms to produce bigger quantities with better efficiency.

Increased acceptance of GM seeds and technology, on the other hand, might stifle much-needed price increases in agricultural products. Despite declines in the overall number of acres planted, yields per acre have grown, according to the USDA. Agricultural producers have found it difficult to plan plantings that would assure a fair return due to the widespread use of GM seeds in agricultural operations.

Furthermore, as GM plants have become more resilient, overall supplies have grown, exerting downward pressure on costs. Overall, the growing use of GM seeds has resulted in cost savings for industry operators, but it has also created logistical challenges in terms of deciding how much to plant. Research estimates that industry sales will expand at a low annualized pace of 0.6 percent to $2.8 trillion during the five years to 2026 as a consequence of mixed business circumstances.

If the COVID-19 (coronavirus) pandemic becomes more severe, research predicts that revenue growth would be slower in this business. Overall, the most serious danger posed by the current pandemic is a decrease in overall demand as a result of lower expenditure on higher-margin foods and price divergence at the farm gate and at the processing level. Things might become much worse if the output is further hampered, given the existing predicament of industrial farmers.

Over the next five years, revenue growth will most likely be supported by higher-yielding crops and increased efficiency in the food supply chain. As corporate engagement develops in tandem with commodity prices, the sector is expected to become more integrated.

Over the five years to 2026, the agricultural price index is predicted to rise by an annualized 0.9 percent, resulting in a small gain in revenue per sale. Moreover, despite the predicted continuance of trade disputes with China, international trade circumstances are likely to shift in favor of local industry operators, increasing exports and further encouraging industry revenue development.

Over the next five years, industry earnings are expected to continue solid, however certain categories are expected to do more than others. Capital-intensive enterprises, for example, will almost certainly gain a competitive advantage if they have access to the newest technology.

Profitability will almost certainly be aided by higher commodity prices and increased production efficiency. In addition, the usage of agricultural advisors and skilled farm managers, as well as crop-enhancing supplies such as GM seeds and fertilizers, will almost certainly improve efficiency. Over the next five years, industry profit is likely to stay roughly stable due to increased exports and prices balancing losses in items supplied to China.

As more family farms seek exclusive arrangements with downstream processors to guarantee a certain amount of revenue, fewer farms remain independently held. Agribusiness corporatization indicates consolidation; however, over the five years to 2026, the number of industry establishments is expected to increase marginally at an annualized rate of 0.4 percent to 2.7 million locations, as some operators are expected to reopen farms that were closed during the pandemic.

Given improved worker productivity and better yields per acre, production is predicted to rise, while employment in the sector is predicted to stay largely flat. Over the five years to 2026, industry employment is predicted to expand by just 0.5 percent per year on average, reaching 7.0 million workers.

Large firms will most likely benefit from the increased revenue generated by agricultural commodities as a result of the greater usage of contract farming. Contract farming is the logical next step for businesses looking to expand their direct agricultural operations.

Because firms can now better assess the profitability of individual farms, the greater business emphasis of family farms has aided major firms in growing their agricultural operations. Companies may also assess the required contribution of each family farm under contract thanks to improved monitoring capabilities.

The increased usage of biofuel will almost certainly provide a major potential for the business over the next five years. Each year, a greater number of ethanol producers join the market. Biodiesel is another growing biofuel, and as the usage of biodiesel grows in the United States, prices of other commodities that are corn alternatives, such as sugarcane for ethanol production, will likely begin to follow the corn market.

Agricultural commodities were utilized primarily for the production of food and animal feed before the introduction of biofuels. These commodities are currently utilized to create fuel for a broad range of purposes, either in conjunction with or instead of gasoline. In the hunt for a sustainable alternative to petroleum-based fuels, biofuel has also been studied for use in big commercial airplanes.

Nonetheless, disagreement over the use of grains for biofuel remains a concern for this expanding sector, with many critics claiming that using agricultural commodities for biofuel would likely result in increased food prices and possible food shortages. Regardless, biofuel production will almost certainly help to maintain a steady demand for maize and soybeans in this market.

Simultaneously, putting too much emphasis on biofuel production might lead the business to stagnate. Blending biofuels with petroleum-based transportation fuels like gasoline and diesel is part of the plan to reach 36.0 billion gallons by 2025. However, if gasoline use does not rise in lockstep with predicted biofuel output, the Environmental Protection Agency may decide to lower rather than raise the Renewable Fuel Standard, leaving producers with more biofuel than they can sell to the transportation fuel market.

As a result, they would purchase fewer maize and soybeans from crop growers, perhaps causing prices to collapse due to an overstock of the products. Additionally, when crude oil and other fuel costs are low, biofuel output decreases somewhat. The Trump government approved a waiver program for small refineries to opt-out of mandatory biofuel production due to low crude oil prices, which has lowered demand marginally in 2020.

With the US presently mired in a trade war with China and the Trump administration aiming to appease voters in soy- and corn-producing areas, there is also talk of amending the US Biofuel Mandate. Overall, the renewable fuels program helps to keep demand and prices for industrial products stable, albeit the program’s structure may alter in the future.

Overall, 2020 was a tough year for biofuel production, as many small refiners were forced to participate in the new waiver program owing to a lack of supplies caused by substantial floods and crop destruction in Iowa and other Corn Belt states. Biofuel’s future is still undetermined, but it will almost certainly play a part in President Biden’s renewable energy policy aspirations.

In the five years leading up to 2026, global demand for food and agricultural commodities is expected to continue robust. Given their closeness and convenience of trade under the USMCA, Canada and Mexico are expected to remain the most important economic partners for the United States. Demand from growing nations like India, as well as other important Asian export markets like Japan and South Korea, is expected to increase.

The expanding middle classes in China are likely to gain significantly from meat and dairy production and processing, as their diets continue to evolve and they consume more western-style meals. For example, Smithfield Foods Inc., a major pork producer, was recently bought by WH Group, a Chinese meat processor, in part to feed the increasing Chinese consumer market.

However, the consequences of Chinese tariffs imposed during the trade war may preclude bigger improvements in export earnings, particularly for US soybeans, dairy, and red meat exports. Furthermore, since the United States was essentially locked out of the Canadian fluid milk export market owing to a reclassification of Canadian milk products, industry operators will almost certainly need to find new export markets for fluid milk.

Canadian ultra-filtered milk is now less costly than imported US versions as a result of this categorization. Under the USMCA, the United States would be allowed to export duty-free 3.6 percent of Canadian dairy output. Exports of US dairy goods are projected to be taxed with a tariff of 200.0 percent to 300.0 percent if they surpass this threshold. Though this will most certainly bring some help to suffering dairy producers, the extent to which it will be sufficient is yet unknown.

Nonetheless, because of an expected depreciation of the US dollar, export markets will likely continue to be an important destination for domestic production; the value of industrial exports is expected to expand at an annualized pace of 1.0 percent to $159.8 billion during the five years to 2026. In contrast, the value of industrial imports is predicted to rise just a little, at a pace of 0.4 percent per year, reaching $153.7 billion.