Mid-Year View of Agriculture

Looking back at 2018, net farm income without Market Facilitation Program money was below $60 billion, this was levels not seen since the 1980s.  MFP government subsidies totaled $5.2 billion and direct farm payments were slightly below 30% of all net farm income.  The Chief Economist at the USDA expects net farm income to increase slightly in 2019 but will remain below $80 billion annually over the next decade.  We will see subsidies exceed another $14.5 billion this year.  This trend has been repeated as every outstanding age for agriculture is followed by a decade of poor performance.  Agriculture net profits have fallen significantly from the $150 billion in 2012. 

The new farm bill was signed into law in December 2018.  This is similar but not a great departure from the 2014 farm bill.  The new bill did make some significant improvements in the USDA and FSA guaranteed loan programs.  It is interesting that 76% of the expenses in the farm bill are tied to nutrition programs and food stamps. Food stamp enrollment has dropped from nearly 48 million people in 2012 to down to 36 million in May 2019.

The Minneapolis Federal Reserve Bank is reporting a rising level of bad agriculture loans among the 531 banks in their district.  A current report from the Creighton University monthly survey of bankers shows that 40% of bankers believe their biggest challenge in 2019 is agricultural loan defaults.   Farm liquidity is weakening, and farm equity continues to burn off with refinancing operating lines which cannot be retired from operations.   Losses in working capital is generating increases in debt.  The USDA expects year ending 2019 farm debt to exceed 1980s levels. 

Farm values in the Tenth Federal Reserve District are stable and not declining rapidly.  Nationally farmland was up in 1.9% in 2018 compared to 2017.  There is still much wealth in farm land as leverage is relatively low.  Consider that in Iowa, 82% of the farm land is debt-free. 

One thing which may help improve prices is the drop in planted acres of wheat and soybeans this year.  Extremely wet weather and a longer winter prevented some farmers from getting crop in the field.  This has helped move some commodities prices higher, but not substantially.  On the critter side, the national cattle and swine herds are both seeing more in their numbers which is helping hold prices down. 

Perhaps the biggest wildcards in agriculture is trade.  U.S. farmers collectively export over 20% of what they produce.  We are the largest producer of beef, soybeans, and corn in the world and the largest exporter of beef and corn and second largest exporter of soybeans.  One of the focuses of Trump’s new trade deals is the level the playing field and give a fairer playing field for American agriculture.  But accomplishing this is causing some pain in the short term.  Sorghum exports to China have dropped by nearly 75%.  China is buying 74% less soybeans compared to last year.  But other countries are purchasing more beans so overall exports are down by 20% from last year’s levels. 

A factor in China may be the strong demand for pork and the dwindling swine population.  The average Chinese citizen consumers 88 pounds of pork a year compared to 33 pounds of beef and chicken combined.  On the production side, China represents 50% of the world pork production and 20% of the world pork imports.  Pork producers in China have a serious problem with African Swine Fever which has a 95% mortality rate and no known vaccine.  This disease has reduced the hog population from 8 to 16% and a reduction of 24 billion pounds of pork production from last year.  Total global pork exports will be around 19.4 billion pounds in 2019.  So, if all pork exports went to China, it will not fill the drop in pork production in China! 

As we see the negotiations with China grow more intense and then quiet, and we also see tariffs imposed and reduced, one issue to consider is Hong Kong.  For a quick history lesson, when Great Britain handed over Hong Kong to China in 1997, China agreed to allow the people if Hong Kong to operate as a democracy, even though it was owned by a communist country.  Some of the recent moves to restrict freedoms in Hong Kong have sparked protests from the citizens there.  If the situation ends with the Chinese army and tanks crossing into the territory, it will probably create a huge cooling in trade talks. 

This blog has hit some key points in agriculture this year.  To summarize, farm income is expected to increase from last year.  Agricultural loans are still a challenge and will be a major issue lender must manage in 2019. Most commodity prices should increase slightly from 2018 levels.  Farm management is very important in a time of weak profits and those who can get an extra 5% production, cut expenses by 5%, or lock in their prices just a little better will be the producers will be viable in the future.  Finally, trade will continue to be a wild card.