The world economy is facing major political, social and economic transitions over the next few years that will reshape global food and agriculture supply chains and trade. Nearly three-fourths of U.S. tree nut production moves into export markets and the size and financial future of the tree nut industry is linked to these transitions.
Dr. Terry N. Barr, Senior Director, Knowledge Exchange Division, CoBank ACB is a nationally recognized economist focused on the interactions between the U.S. and global economy and the global food and agriculture markets. Dr. Barr served as chief economist for the National Council of Farmer Cooperatives and held several senior positions at the U.S. Department of Agriculture.
For over a decade the global economy has been on a rollercoaster. A commodity super cycle was fueled by rapid economic growth, a growing middle class in Asia and a drive for renewable energy. It ended with a financial crisis that led to the worst global recession in modern history. Government policies in recent years have been focused on stimulating economic recovery through record levels of public debt and accommodating monetary policies such as zero interest rates and quantitative easing. With the economic recovery now maturing the focus in each region has turned to addressing the structural imbalances that have emerged as a result of those policies.
The U.S. tree nut industry has ridden the commodity cycle wave since 2005 and the export value has tripled while the volume has more than doubled. However since 2015 the export value has plateaued while export volumes have continued to rise by 25 percent. The strong U.S. dollar and global competition have pushed unit values lower. The industry exports product to nearly 170 countries but two-thirds of the flow over the past few years has gone to the European Union, Hong Kong, NAFTA countries and India. These countries hold the key to future export growth potential.
Each of these major markets, including the U.S. which accounts for about one-fourth of total usage, are facing difficult economic, political and social choices over the next few years. Rising nationalism and growing anti-globalization sentiments are complicating the political search for policies that will address aging populations, income inequality, deteriorating infrastructure and economic growth. Record levels of public debt created to address the global financial crisis are a major limitation to policy options. These issues must be addressed even as the world’s central banks begin to remove the accommodating monetary policies that have fueled the global economic recovery. Since the financial crisis in 2009 the world’s central banks have implemented zero or negative interest rate policies and injected nearly $13 trillion in liquidity to the financial markets. That liquidity will be gradually removed from the market over the next few years and interest rates will rise. Global terrorism and geo-political disputes will continue to be a destabilizing force in the marketplace.
More countries contributing to global growth
While there are significant downside risks for the global economy the base for growth is broadening as more countries emerge from the financial crisis and contribute to growth. There is also room for some upside surprises if fiscal stimulus reemerges in several regions and political uncertainty is reduced. Underlying demand for U.S. tree nuts should remain steady in this environment. But policy actions or inaction in response to ongoing challenges in each of the major markets for tree nuts will shape growth going forward and should not be underestimated in strategic planning:
The U.S. economy appears to be on solid footing for growth continuing at a moderate pace that will support domestic tree nut demand for several years. The current business cycle will become the longest in U.S. history by the second half of 2018. Hurricanes Harvey and Irma will reduce growth in the short term but the reconstruction phase will boost growth. The challenge is the political uncertainties revolving around government spending priorities / tax reform, regulatory reform and international issues related to trade and immigration. Providing greater clarity to consumers and the business community on many of these issues could boost domestic growth. Renegotiation of trade agreements such as NAFTA and trade actions with China and other trading partners will impact future trade flows, particularly for agriculture. The strong value of the U.S. dollar, particularly since mid-2014 has been a major factor in reducing U.S. competitiveness in global markets. From mid-2014 until the end of 2016 the U.S. dollar rose in value by over 25 percent relative to the major currencies and sharply reduced the buying power of global consumers. Since December 2016 the value of the U.S. dollar has fallen by 10 percent. Continued shifts in relative growth rates and central bank policies are likely to move the dollar lower, enhance foreign purchasing power and provide more pricing opportunities than in recent years.
Growth prospects in the European Union (EU-28) have improved but it faces a similar range of political uncertainties regarding government spending and debt levels but they are complicated by issues over the rising immigrant populations. The negotiations over the exit of the United Kingdom from the EU could be a major distraction until completed in 2019. New leadership in the U.K. and France has not consolidated their political base and only Germany appears on a solid growth path. The EU, which is currently negotiating new bilateral agreements with Japan and Australia, continues to seek new trade agreements across the world. Meanwhile the U.S. has withdrawn from the Trans-Pacific Partnership (TPP) negotiations, begun a renegotiation of NAFTA and is reviewing all of its existing trade agreements. The EU accounts for about one-third of all U.S. tree nut exports.
The Hong Kong/China market will also be in transition in 2018 after the completion of the 19th National Congress of the Communist Party in October 2017. President Xi Jinping will consolidate his leadership control and reaffirm commitments to their plan of doubling the size of their economy from 2010 to 2020. This will require continued growth of 6-7 percent per year but some imbalances may need to be addressed in 2018. They will also reaffirm commitments to global trade, particularly the One Road, One Belt policies to provide infrastructure investment to create a land-based Silk-Road Economic Belt and an oceangoing Maritime Silk Road. The Hong Kong/China market accounts for nearly 20 percent of U.S. tree nut exports.
The NAFTA countries of Canada and Mexico continue with steady growth that remains deeply linked to U.S. economic growth. The decline in commodity prices, particularly oil, has forced economic realignments but the greatest current concern is the renegotiations of the NAFTA agreement. Both countries are reexamining their traditional export and import supply chains in the context of the negotiations and may choose to expand trade flows with non-NAFTA countries. Canada is the third largest individual country for U.S. tree nut exports.
India has become one of the most rapidly growing markets for U.S. tree nuts in recent years. Growth rates in India are likely to recover to the 7 to 8 percent range well into 2018 after their currency exchange initiative in late 2016 slowed economic growth. Consumer demand may also be bolstered by some recovery in the value of the Indian rupee. The Indian rupee fell by nearly 40 percent to the U.S. dollar following the financial crisis and sharply eroded consumer purchasing power relative to U.S. products.
The world market holds significant potential
In the short term the global economy will continue to grapple with major transitions and the next decade will be one of continued volatility. But the underlying trends in the number of people entering the middle class over the next decade suggest significant potential for market growth for food and agriculture. From 2015 to 2030 it is estimated that the number of people entering the middle class will increase by 2 to 3 billion. The number of people entering the middle class is particularly important for the food sector. When people enter the middle class one of their first priorities is to upgrade their diets. As they solidify their financial position they move on to housing, transportation, electronics, etc. It should also be recognized that very little of this middle class growth will occur in the advanced economies of North America or Europe. Nearly 90 percent of the middle class growth will occur in the Asia pacific region.
Translating that growth into a market opportunity for products such as tree nuts will require at least four ingredients. The ability to pay on the part of the consumer, access to the market, transportation infrastructure and development of competitive products to match the consumer preferences of the specific markets. Seizing the potential will require public policies that support global trade and strategic investments on the part of the tree nut industry.