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Wall Street's Perspective on Changes in U.S. Agriculture

February 4, 2005, Issue #392
Monitoring Corporate Agribusiness

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THROUGHOUT the seven years of its existence THE AGRIBUSINESS EXAMINER a very generous --- albeit quite small --- cadre of readers have been providing it
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American agriculture is suddenly going through a lot of changes.

After decades as the world's biggest farm exporter, the U.S. farm sector is
facing new challenges. Overseas farming giants are emerging to eat into
America's business of supplying the world with crops such as wheat and

And at home, American consumers are demanding that farmers change the way
they grow and sell their produce and livestock. Consumers want
pesticide-free produce, giving rise to new ways of cultivating and
processing food. They also are seeking new eating experiences. Their
appetite for Chilean sea bass, vanilla-flavored lattes made with Italian
syrups, and grapes in winter is erasing the U.S. farm sector's unique
ability to generate a trade surplus.

U.S. farmers are seeking new streams of income from their land, such as
developing wind power, and, most important, many are learning how to be
marketers for the first time.

Here are some major trends down on the farm.

1. The Shifting Global Balance

Thanks to cheap land and labor, Russia, Brazil, Argentina, China and other
countries are emerging as powerful agricultural producers. The burgeoning
titans are building new roads and bridges that benefit their farming
infrastructure, and overseas farmers now have access to U.S. equipment and
sophisticated biotechnology that deters weeds and bugs.

Russia, for instance, used to depend heavily on the U.S. for wheat, but is
becoming a rival wheat exporter. It's expected to ship almost six percent of
the world's total wheat exports this year, according to the U.S. Department
of Agriculture.

The USDA predicts that there will be no trade surplus in agriculture by the
end of 2005. Just four years ago, the U.S. farm sector was generating an
annual surplus of $13.7 billion.

But U.S. farmers are working to stay competitive. "What we're seeing among
our best producers is embracing technology to reduce their costs of
production to become more efficient," says Keith Collins, chief economist at
the USDA. U.S. farmers continue to have an edge in things like irrigation
and risk-management tools such as futures contracts and federally subsidized
crop insurance.

2. Tasty Imports

U.S. consumers have increased their appetite for foreign food, and retailers
are capitalizing on the trend. Imported food was once hard to find, but now
retail chains like Cost Plus Inc. of Oakland, California, are popping up in
suburban strip malls, selling treats like Swedish gingersnaps and Australian
wine. The rise of new farm powers also is shifting the balance.

Trade pacts, including the North American Free Trade Agreement, make it
easier for the U.S. to bring in food from other countries. Meantime,
European countries have blocked U.S. exports of some genetically modified
foods, and several other countries banned U.S. beef after the first U.S.
case of bovine spongiform encephalopathy, or mad-cow disease, was discovered
in December 2003.

Other countries also can produce raw ingredients at a lower cost, prompting
food companies to go overseas for supplies.

3. A Modified Success

After sweeping across the American Farm Belt, genetically modified crops are
making inroads overseas --- despite resistance in some nations where critics
contend they could pose unknown risks to the food supply. Modified crops can
tolerate weed-killing chemicals and resist damaging pests, saving farmers
money in labor and lost crops.

Eighteen countries now grow biotech crops, with Argentina, China, Canada and
Brazil leading biotech growth outside the U.S. An additional 45 are
researching and developing their use, according to a study by C. Ford Runge,
director of the University of Minnesota's Center for International Food and
Agricultural Policy.

Monsanto Co., of St. Louis, is pushing into India with biotech corn and
cotton, and into Brazil with biotech corn, cotton and soybeans.

And, while Europe imposed a de facto moratorium on the production and import
of gene-spliced foods, it's starting to ease some restrictions.

4. Organic Growth

As demand for organic food grows, so does the number of organic farmers.
Sales of organic food are growing about 18% a year, with meat and fish
experiencing the fastest growth, according to figures from the Organic Trade
Association. The amount of U.S. certified organic cropland for corn,
soybeans, and other major crops doubled from 1997 to 2001, according to the

Instead of just growing organic strawberries and apples, farmers are
expanding into agricultural staples like organic corn, wheat and soybeans as
food marketers offer more organic products.

For farmers, the lure of going organic is a chemical-free work environment
and higher organic-crop prices. Organic produce sells at about a 30% premium
to traditional produce. However, much of that premium gets eaten up by the
higher cost of growing chemical-free crops. Converting pesticide-tainted
land into organic soil can cost as much as $10,000 per acre.

Although the number of organic farmers continues to climb, there are signs
the growth may be leveling off. The number of organic farms rose by about
12% each year from 2000 to 2003 in California, the state with the most
organic farmers. But last year, it grew only six percent to seven percent,
for a total of about 3,000 organic farms in the Golden State.

5. Longer Life

Commodity processors are increasingly using sophisticated equipment to
improve the shelf life and taste of foods.

Chiquita Brands International Inc., of Cincinnati, last fall invested $3.5
million in a company that makes packaging designed to keep bananas fresher.
Landec Corp., based in Menlo Park, California, has developed a membrane that
regulates the flow of gases through the packaging. When shipped and stored
in the packaging, the shelf life of a banana about doubles, making its
quality more consistent.

6. The Safety Challenge

The industrialization and globalization of farming is making food safety
more challenging. Food travels farther, spends more time in transit and is
touched by more hands, increasing the opportunity for problems as well as
the potential scope of any outbreak.

With the U.S. getting more food from overseas, detecting an outbreak and
finding its source becomes more complicated and costly. The USDA estimates
that five common food-borne illnesses cost the economy $6.9 billion annually
in medical expenses, lost productivity and deaths.

Food-safety advocates also worry that new farming practices are having
unintended consequences. Livestock are increasingly raised in confinement, a
technique that allows producers to control their environment and diet in
order to speed growth. But raising a large number of animals this way can
make it easier for diseases to spread. Many producers resort to antibiotics
so often that medical experts are growing concerned. The problem is that the
practice can increase the opportunity for bacteria to develop resistance to
antibiotics used in human medicine.

New technology is helping processors screen for bacteria. Minneapolis
commodity-processing giant Cargill Inc. is installing a system of blue
lights in its meat plants that can detect traces of chlorophyll on beef
carcasses --- a sign that stray animal guts may have spread E. coli onto the
beef. Previously, this job was largely handled by inspectors relying on keen
eyes to spot problems with the meat.

7. Keepings Tabs on Trees

In a key food-safety advancement, the government and technology companies
are laying the groundwork for a nationwide livestock-tracking system that
would help prevent the spread of diseased meat.

By tracking animals from birth to the supermarket, regulators would be
better able to find those that are potentially exposed to diseases and keep
them out of the food supply.

The USDA has said it will put $51.8 million toward an identification system.
Many technology companies are vying to supply the gear, and some farmers are
already adapting it. Digital Angel Corp., of South St. Paul, Minnesota,
makes a livestock ear tag that contains a data-rich microchip. The company
sold more than one million units last year, five times as many as in 2003.

Some farmers fear such a system would bring to their doorstep liability for
a food-safety problem. Cattlemen "tend to be very independent, and they are
always concerned about Big Brother inserting itself into their business,"
says Kevin McGrath, president and chief executive of Digital Angel.

8. The Answer in the Wind

Seeking new streams of revenue, farmers are leasing land to energy companies
that erect towering turbines with wind-spun blades to produce energy.

Such projects are a small but important source of income for farmers,
particularly in poor rural counties. One turbine can generate as much as
$5,000 in lease payments a year, according to a report by the U.S.
Government Accountability Office.

The Department of Energy is aiming to make wind power the source of 5% of
the nation's electricity by 2020, up from less than one percent in 2004. The
department estimates the shift will provide $1.2 billion in new income for
farmers and rural landowners and create 80,000 new jobs.

One challenge will be to match wind supply with demand. States that are best
suited to produce wind power, including North Dakota and South Dakota, have
seen little investment because they lack big cities to use the power and the
transmission capacity to deliver it to small, remote towns, according to the
GAO. State tax incentives have speeded projects in California, Texas and
Minnesota, and federal funding that stretches through 2007 likely will spur
more investment.

9. Aging Farmers

Young people continue to eschew farming, changing the demographics of the
typical American farm household. The average age of principal farmers has
risen steadily since 1978; in 2002 it was 55, up five years from 1978.

Experts say that thin profits in most years and steep upfront costs are
keeping many young people from starting their own farms or even taking over
the family farm. A poll conducted by Iowa State University last March found
that 57% of Iowa farmers would not encourage young people to become farmers.

The state is working to change that. An Iowa State University program pairs
aspiring farmers with ones who want to retire yet don't have heirs to take
over their farms. Prospective farmers work as apprentices and get advice on
securing loans to help them buy land. Since 1992, the program has matched
about 90 farmers.

10. Fewer Farms

The continuing decline in the number of U.S. farms is reshaping the Farm
Belt. The number of American farms peaked in 1935 at 6.8 million. As of
2003, there were 2.1 million farms nationwide, largely because of widespread
farm consolidation. Improvements in farming equipment have reduced the
amount of labor needed on farms and made it easier for farmers to handle
large plots of land.

The declining farm numbers have been chipping away at the population of
rural areas. That has broad implications for small-town America.
Once-thriving downtowns are struggling in part because they have fewer
farmers to patronize their stores.

The trend also is reshaping the political landscape for the agricultural
industry. While the Farm Belt still has substantial clout in Washington,
state farm legislation is increasingly being drafted by people who lack ties
to agriculture, says Paul Lasley, chairman of the sociology department at
Iowa State University.