January 23, 2020

Federal Reserve Beige Book: Observations on the Ag Economy- March ’16

Today, the Federal Reserve Board released its Summary of Commentary on Current Economic Conditions. Commonly referred to as the “Beige Book,” the report included the following observations with respect to the U.S. agricultural economy:

* Fifth District- Richmond– “Commodity prices remained depressed.”

* Sixth District- Atlanta– “On a year-over-year basis, monthly prices paid to farmers for corn, cotton, rice, soybeans, beef, broilers, and eggs have declined.”

* Seventh District- Chicago– “Crop farmers continued to cut capacity following another year of low incomes coupled with unexpectedly small declines in input costs. There were reports of major downsizings of large operations and of some farms going out of business. Farmers are also cutting capacity by purchasing cheaper but lower-yielding seeds and by selling machinery. Correspondingly, prices for used farm machinery are low because of plentiful supply. Corn, soybean, and wheat prices moved higher during the reporting period, but remained quite low compared to their five-year averages. Dairy, egg, hog, and cattle prices were up from the prior reporting period, but remained low.”

* Eighth District – St. Louis– “As of the end of January, almost 93 percent of the District winter wheat crop was rated fair or better. Red meat production in 2015 was 6 percent higher than in the previous year, an increase that has been explained, in part, by lower feed costs, although meat prices also fell during the year.”

* Ninth District- Minneapolis– “District agricultural conditions remained weak. A majority of respondents to the Minneapolis Fed’s fourth quarter (January) survey of agricultural credit conditions reported that farm incomes and capital spending fell in the previous three months compared with a year earlier. An animal feed dealer reported that after several years of strong sales, its revenue outlook was flat due to recent declines in the prices of livestock. Prices received by farmers fell in December from a year earlier for corn, wheat, soybeans, hay, hogs, cattle, chickens, eggs, and milk; prices for turkeys increased from a year earlier.”

* Tenth District- Kansas City– “Tenth District farm income weakened further since the last survey period, and cropland values declined modestly. Persistently low crop prices and sharp declines in cattle prices contributed to lower farm income in all District states. District cropland values continued to decrease slightly, while ranchland values levelled off. Similarly, cash rental rates on all types of farmland moderated and were expected to fall further in the next three months. Alongside lower farm income, farm loan repayment rates weakened further, and demand increased for new loans as well as loan renewals and extensions. Looking forward, District contacts expected modest declines in cropland values as well as continued pressure on credit conditions amid tighter profit margins for crop and livestock producers.”

* Eleventh District- Dallas– “Soil moisture conditions remained healthy, with only 2 percent of Texas considered abnormally dry in February, compared with 56 percent last year in some level of drought. While prospects for 2016 crop production are strong, farmers face low prices and downward pressure on exports because of the strong dollar. Industry contacts said many producers will not be able to cover their production costs at the current crop price levels, and some have received calls from their lenders voicing concern. Cotton—Texas’ top crop—has seen prices push even lower with risks to the downside. Contacts reported that low prices and weakening demand will likely result in fewer cotton acres planted this year. Milk prices continued to drift unprofitably low, despite the supply disruption in the wake of winter storm Goliath, which killed roughly 30,000 dairy cows in West Texas and New Mexico. Cattle prices were lower than the record levels posted a year ago but are still relatively high.”

* Twelfth District- San Francisco– “Activity in the agriculture sector was flat over the reporting period. Continued dollar appreciation slowed agricultural exports in general, although exports of pork products rose as demand from Asia strengthened. Contacts reported that domestic demand from restaurants slowed for some vegetable products. Despite an unusually wet winter, overcoming prior drought conditions remains a costly challenge for growers and ranchers in much of the District. Contacts expect conditions in the agriculture sector to remain roughly the same over the coming year as commodity prices remain soft and exports continue to be subdued.”

Keith Good

Hearing: House Ag Subcommittee on Conservation

Categories: Conservation /Farm Bill

Yesterday afternoon, the House Agriculture Subcommittee on Conservation and Forestry held a hearing titled on land conservation issues.

Subcommittee Chairman Glenn ‘GT’ Thompson (R., Pa.) indicated at yesterday’s hearing that, “The Earth’s population is projected to grow to roughly 9 billion people by the year 2050. Given the growing demands on farm land everywhere, we must invest in the necessary resources and best practices to be certain that producers can continue to meet this growing need. To that end, I am particularly proud of this committee’s work on conservation programs during the deliberation of the most recent farm bill. The 2014 Farm Bill contained creative, outside-the-box approaches to funding and delivering conservation programs.

“One of the biggest successes of this creative approach has been the Regional Conservation Partnership Program, known as RCPP. RCPP is an innovative approach to target conservation initiatives. It uses NRCS programs that produce known conservation improvements, and leverages that federal funding with matching funding from partners in the private sector. It has brought together broad coalitions consisting of commodity organizations, conservation groups, sportsmen, and others to unite around a common goal.

“In the first two years, RCPP has awarded funding to 199 projects across all 50 states and Puerto Rico and matched over $500 million in program funding with $900 million from partner contributions. These efforts that bring all perspectives to the table are the ones that are actually working. It takes everyone coming together.”

USDA’s Natural Resources Conservation Service Chief, Jason Weller, noted yesterday that, “Science-based solutions and innovative tools are also supporting the locally led approach. NRCS is advancing innovative partner-driven conservation through the [RCPP]. Created by the 2014 Farm Bill, RCPP is a locally led conservation approach that is already showing results. Now in its second year, RCPP has demonstrated high demand, with over 2,000 partners leading nearly 200 projects nationwide. All told, in the first two years of the program, NRCS will have invested about $500 million while another $900 million is being brought in by partners to address locally defined, nationally significant natural resource issues. For the next round of RCPP funding, NRCS will challenge partners to consider environmental markets and conservation finance systems with agricultural opportunities.”

Frank Price, a rancher from Texas, explained at yesterday’s hearing that, “U.S. cattlemen own and manage considerably more land than any other segment of agriculture— or any other industry for that matter. Cattlemen graze cattle on approximately 666.4 million acres of the approximately 2 billion acres of the U.S. land mass. In addition, the acreage used to grow hay, feed grains, and food grains add millions more acres of land under cattlemen’s stewardship and private ownership. Some of the biggest challenges and threats to our industry come from the loss of our natural resources. The livestock industry is threatened daily by urban encroachment, natural disasters, and government overreach. Since our livelihood is made on the land, through the utilization of our natural resources, being good stewards of the land not only makes good environmental sense; it is fundamental for our industry to remain strong.”

Mr. Price noted that, “The Environmental Quality Incentive Program, or EQIP, is a cost-share program that rewards and provides incentives to producers for implementing conservation practices. When wildfire came through our ranch in 2011, we had to rebuild miles of fencing. EQIP helped us do it. One of the reasons EQIP has become popular among ranchers is because it is a working-lands program. Conservation programs that keep land in production and do not limit its use are best for both the ranchers and conserving our resources.

“Another working lands program is the Conservation Stewardship Program. CSP rewards those of us that have been conservationists and have spent the time and money in the improving of our land, water, and wildlife habitats. CSP offers cattlemen the opportunity to earn payments for actively managing, maintaining, and expanding conservation activities like cover crops, rotational grazing, ecologically-based pest management, and buffer strips.”

Subcommittee Ranking Member Michelle Lujan Grisham (D., N.M.) added at yesterday’s hearing that: “I’ve often mentioned the inadequate rainfall and drought conditions in New Mexico and the Southwest. Fortunately, there are conservation tools available to help Southwestern producers cope with these situations. I’ve heard from several New Mexican producers that the Conservation Stewardship Program, which pays producers to adopt conservation activities to improve working lands, helped in keeping many farmers and ranchers on their lands and in business during the past drought, which lasted about 5 years.”

Keith Good

Ag Economy: Senate Ag Appropriations Subcommittee Roundtable

Yesterday, the Senate Agricultural Appropriations Subcommittee, which is chaired by Sen. Jerry Moran (R., Kans.), held a roundtable discussion on the state of the farm economy.

In prepared remarks, Dr. Patrick Westhoff, the Director of the Food and Agricultural Policy Research Institute at the University of Missouri, indicated that, “Farm commodity prices have declined sharply after reaching record highs in recent years. For example, the marketing year average price for corn fell from $6.89 per bushel in the drought year of 2012/13 to an estimated $3.60 per bushel just three years later (Table 1). Wheat, soybean and cotton prices have also declined. The high prices of the 2010-2012 period and more favorable weather conditions resulted in a large increase in U.S. and global crop production, while a variety of factors limited demand growth, so carryover stocks increased. Crop cash receipts fell by 17 percent between 2012 and 2015.”

Dr. Westhoff added that, “The decline in crop and livestock receipts has resulted in a dramatic reduction in net farm income relative to the record level of 2013. Lower fuel, fertilizer and feed prices helped reduce production costs by about $10 billion in 2015 and another reduction is expected in 2016, but the projected cost reductions are not nearly enough to offset revenue losses.

“Given all the assumptions of our analysis, net farm income remains well below recent peak levels.”

At the conlcusion of his prepared remarks yesterday, Dr. Westhoff indicated that, “If these projections prove correct, it suggests an extended period of financial stress in U.S. agriculture. Not only are farm incomes expected to remain well below recent peaks, but businesses that sell machinery and inputs to farmers are also likely to be negatively affected. Farm asset values are likely to be under pressure, especially if interest rates increase.

“However, it is also important to maintain perspective. While rising debt is a serious concern, debt-asset ratios remain low by historical standards. Even if interest rates increase from current levels, they are likely to remain well below the levels that prevailed during the farm crisis of the 1980s. While commodity prices are well below recent peaks, they remain high by pre-2007 standards.”

Meanwhile, Nathan S. Kauffman from the Federal Reserve Bank of Kansas City observed that, “Corn prices, for example, dropped by more than 50 percent from the peak in 2012 to the latter part of 2014. Since 2014, prices have fluctuated some, but have largely remained flat over the past 18 months. Soybean prices also dropped significantly from 2012 to 2014 and have continued to fall over the past year. The prices for other major crops, such as wheat, sorghum and rice, have experienced similar declines in varying degrees. Input costs for crop production have declined somewhat over the past 12 to 18 months due to lower fuel costs and modest reductions in fertilizer prices. However, costs have generally remained high, and many producers have continued to report negative profit margins, with crop prices below their breakeven cost of production.”

Dr. Kauffman also noted that, “The persistent declines in farm income and poor profit margins have reduced cash flow and increased short-term lending needs in the farm sector.”

The prepared remarks also included this graph depicting regarding land values:

Keith Good