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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