Valuation of the Agriculture and Forestry Industry

Dolbeck, Andrew

The agriculture and forestry industry covers a wide range of operations in which products are developed from natural resources. Agricultural production covers establishments primarily engaged in the production of crops and plants and the keeping, grazing, or feeding of livestock for the sale of livestock or livestock products. Agricultural services include soil preparation services, crop services, landscape and horticultural services, veterinary and other animal services, and farm labor and management services. Forestry covers establishments primarily engaged in the operation of timber tracts, tree farms, or forest nurseries. Fishing and hunting are also part of the greater agriculture and forestry industry.

The Agriculture sector

As part of the greater food production and distribution operations of the United States, the agriculture sector is subject to considerable regulation. The sector can also be impacted by controls on marketing and advertising placed on the greater food industry.

In early 2005, the Food and Drug Administration revised it public dietary guidelines. The revised recommendations call fewer servings of grain products than the number given in the previous guidelines issued in 2000. But the guidelines are more specific - this time around, the government is calling for three of those servings to be wholegrain, as opposed to refined grain products. The change is expected to produce an increase in demand for food items produced from whole grains.

Agricultural products are marketed globally. In the 2003-2004 season, Washington state, the leading producer of apples in the US, exported more than 17 million cartons to international customers, including Mexico, Canada, Taiwan, Indonesia, and Hong Kong. The 2004-2005 season is expected to ship an estimated 22 million to 28 million cartons.

Operating on a global scale, the industry must also contend with international politics, as well as safety and trade regulations. The US has recently asked the World Trade Organization to set a panel to consider US accusations that 25 EU member nations maintain customs practices that make it difficult to export agricultural products into Europe. In another example, Taiwan's Council of Agriculture recently imposed a temporary import ban on apples produced in the United States after finding a moth larvae in a shipment of apples from Oregon. In response, the US adopted emergency measures to restore exports to Taiwan.

In a similar case, the US (and eventually 33 other countries) placed a moratorium on Canadian cattle imports in May 2003 after a case of mad cow disease. The current administration is considering lifting the ban. US cattle groups, who claim that safety is still an issue, oppose the removal of the trade restriction. Their opponents, however, point out that the trade policy has increased the price of beef products in the US, which is good for the American cattle industry. Science and health experts contend that the safety concern is significantly overblown. The trade restriction is also harming the US meat-packing industry. Tyson Foods recently announced that it has closed several plants and laid off workers as a result of the embargo.

The Forestry sector

The demand for lumber and lumber products is currently high, driven by robust housing and industrial construction activity. The southeast region of the US, still rebuilding from hurricanes that struck in 2004, is particularly adding to the demand. Newsprint prices are also on the rise, mainly due to lower inventory levels in the marketplace. Average selling prices for newsprint stood at $580 per ton at the end of 2004, up nine percent from the start of the year.

Timberland companies are taking advantage of recent real estate buying euphoria. Current high property values allow land owning forestry concerns to sell property at a strong profit. Proceeds are used for primarily for debt reduction.

Research firm Value Line predicts that the forestry sector will see solid profits in 2005, stating, "As long as the domestic and global economies stay healthy, market conditions for the forest products industry ought to remain favorable." secondary manufacturing businesses that create products such as lumber, plywood, and fiberboard are expected to do especially well.

Profits may dip in 2006, however. Mortgage rates are liable to be substantially higher by then, which would lead to a slowing in the housing market, thus reducing the demand for construction lumber.

The forestry sector is a popular target for environmentalists. Arguing that ancient trees are crucial to ecosystems and that they cannot be replaced with replanting operations, many environmental groups strive to protect old growth forests.

Environmental concerns impact the forestry industry. In November 2004, Boise Cascade announced new operational guidelines that included a statement that the company would no longer log old growth forests in the United States and would also take steps to ensure the protection of other endangered trees as well. Boise owns or manages 2.4 million acres of forestland, and has been one of the largest loggers of public land in the United States.

Outlook

The agriculture and forestry industry provides base materials for a wide range of markets. The food, paper, packaging, lumber, and construction industries all generate demand for agricultural and forestry products. With such a broad range of support, the industry will likely remain profitable as long as the economy continues to remain healthy. Because the industry operates on a global scale, it remains subject to changes in international politics and worldwide economics, which can make its future difficult to predict.

Sources: Journal of Commerce, Multinational Monitor, US Department of Labor, Value Line, Wall Street Journal

By Andrew Dolbeck

Editor

Copyright NVST, Inc. Jan 24, 2005
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