District producers of agricultural goods and natural resources are enjoying a renaissance. The increases in commodity prices have lifted spirits across the district from Montana mines to Dakota wheat fields and cattle ranches, from Minnesota hog and soybean farms to western Wisconsin dairy farms, and to the forests in Michigan's Upper Peninsula. Spurred by the higher prices, many district producers are trying to increase output and profits.
Greater world demand, the weaker dollar and in some cases restrictions in supply played a part in orchestrating the jump in prices. Strong economic output in developing countries has increased demand for inputs, especially for basic commodities. Consistent with historical trends, the decline in the value of the dollar pushed up dollar prices for globally traded commodities like gold. Meanwhile, negative supply shocks such as a poor harvest and disruptions to production added pressure to raise prices.
Several agricultural segments have seen large price increases. Since January 2003, soybeans, corn and wheat increased by 78 percent, 33 percent and 13 percent, respectively. Since these important district crops are easily exported, their prices were affected by the relatively weak dollar. In addition, the supply of soybeans was negatively affected by poor weather conditions in South America last year, and demand is expected to increase as domestic consumption and exports increase, according to the U.S. Department of Agriculture. Meanwhile, corn demand is up as a result of expanded ethanol production. In response, soybean and corn producers are expected to increase production this year—taking acres away from wheat.
Animal product prices have also jumped. Eggs and poultry have seen their respective prices increase by 34 percent and 30 percent. In addition, cattle, hog and milk prices increased by 14 percent, 50 percent and 53 percent, respectively. Strong domestic demand for meat and the weaker dollar added upward price pressure, while a dairy association's program to pay farmers to decrease the size of their herds and a ban on imports of Canadian cows put a crimp on the milk supply. The increased prices are expected to spur producers to expand total U.S. meat and milk production in 2005. However, the higher commodity prices in feed, energy and fertilizer are a double-edged sword because they raise agricultural producers' costs.
Even with increased input costs, the strong agricultural output prices appear to have boosted producers' bottom lines. Results from the Minneapolis Fed's first-quarter survey of agricultural credit conditions revealed that 68 percent of lenders saw their farm customers reap above-normal profits. (See detailed results of this survey.)
Several forestry products have also had large price increases over the last year and a half. Softwood plywood, softwood lumber and hardwood products have seen increases of 94 percent, 30 percent and 23 percent, respectively, since the beginning of 2003. Record construction of new homes in 2003 spurred a big rise in construction materials prices. Meanwhile, pulpwood prices have also increased and peaked in December 2003 at 17 percent over the January 2003 price. The weaker dollar played a part in reducing imports of lumber and pulpwood from Canada, which contributed to the price increases.
April 2003 prices for platinum and silver exhibited increases from January 2003 of 19 percent and 22 percent, respectively, and gold ore prices have increased by 18 percent. The decline in the value of the dollar raised the dollar prices of metals. Increased construction worldwide, especially in rapidly developing countries like China, spurred demand for metals. One example is the sizable demand for copper plumbing pipes for new buildings. In response, prices for copper ore jumped 72 percent, good enough to convince a copper mine in Montana to reopen.
The energy sector has also experienced higher prices, though not to the degree of some of the other Ninth District commodities. The oil and gas fields of western North Dakota and eastern Montana enjoyed increased revenues, as crude petroleum and natural gas prices for April 2004 rose 15 percent and 10 percent, respectively, from January 2003 levels. Oil prices are volatile and sensitive to changes in supply and demand. Worldwide demand has grown, while geopolitical instability and actions by the Organization of Petroleum Exporting Countries affected supply. Oil wells in North Dakota and Montana together produce about 130,000 barrels of crude a day, and the upsurge in prices is spurring further exploration as the number of district drilling rigs increased to 30 this April from about 20 a year ago.
Meanwhile, the coal fields in Montana and North Dakota, which produced more than 70 million tons in 2003, enjoyed an 11 percent price increase in April 2004 from January 2003. Demand for coal from electric power generators and coke plants increased in 2003, while supply was constricted by transportation and production disruptions.