FarmPolicy

November 25, 2017

House Ag Subcommittee: Growing Farm Financial Pressure

Recall that recent news items regarding the agricultural economy have included phrases like, “Mounting Pressure,” and “There Definitely Could be Some Pain;” while the Federal Reserve Board indicated in its most recent Beige Book report that, “Some crop input prices, such as fertilizer and diesel prices, moderated from year-ago levels, but profit margins were expected to remain relatively weak due to suppressed commodity prices.”

The Fed added that, “A contact in eastern Montana reported that less- profitable farms were leaving the business, and more exits were expected.”

Yesterday, the House Agriculture Committee’s Subcommittee on General Farm Commodities and Risk Management held a hearing on the “growing financial pressures faced by U.S. farmers and ranchers. ”

A Subcommittee news release yesterday indicated that, “Conditions in farm country today contrast sharply with those during the formulation of the 2014 Farm Bill. While high prices for many farm commodities led to tremendous growth in net farm income through 2013, many of those prices have spiraled downward over the past three years. Witnesses spoke broadly about the factors that are driving current market conditions, the bleak outlook going forward, and the impact that both are having and could continue to have on our nation’s farmers and ranchers going forward. They also spoke to the vital role that farm policy and crop insurance are playing in helping absorb some of the shock, and they stressed the devastating impact that further reductions to these vital tools could have.”

Subcommittee Chairman Rick Crawford (R., Ark.) stated that, “Next year, we will head into a new Congress, and we will write a new Farm Bill. As we head into that long and difficult process, I hope our colleagues who are less directly involved in agriculture or farm policy will reflect on just how critically important farm policy is in responding to a crisis that can happen overnight.”

USDA Chief Economist Dr. Rob Johansson indicated at yesterday’s hearing that, “A strong dollar coupled with high-levels of global agricultural production leave U.S. producers facing commodity prices that continue to decline from record levels and a more difficult trading environment than last year. As a result there will be growing financial pressures on some producers this year, as expected revenue may not be sufficient to cover expected costs. Overall, USDA forecasts that net cash income will fall again in 2016.”

And Texas A&M agricultural economist Joe Outlaw pointed out yesterday that, “Cash rents have come down a little, but nowhere near the amount that commodity prices and returns have fallen. This is due in-part because some producers have multi-year lease agreements. However several cash lease tenants reported their landlord’s have been unwilling to lower cash lease rates.”

Dr. Outlaw added that, “[T]the current poor situation on farms across this country would be considerably worse if not for the safety net provided by both Title I commodity policies and federal crop insurance. There are some in agriculture who say that commodity policies are more important than crop insurance or vice versa. I believe they are equally important – especially during times of low prices. For example, lenders tend to view crop insurance as being more important because the insurance guarantee is ‘bankable,” meaning it is something on which they can base a loan. On the other hand, producers see the commodity assistance as the only chance they have of coming close to breaking even in a low price environment.

“And finally, in my opinion, the interest groups that continue to call for changes that would negatively impact these two key policy tools clearly either have no idea how difficult the financial situation is across agriculture or they simply do not care. Farmers in this country deserve better than to continually be threatened with changes that I consider a dismantling of the safety net.”

With respect to the price outlook for 2016, University of Illinois agricultural economists Scott Irwin and Darrel Good indicated recently at farmdoc daily (“Forming Corn and Soybean Price Expectations for 2016-17“) that, “Using new ending-stocks-to-use pricing models (farmdoc daily, April 6, 2016), we conclude that the probability of the 2016-17 marketing year average farm price of corn and soybeans to be below $3.40 and $9.00, respectively, appears to be quite low at this time. For perspective, substantially lower prices would require a demand environment even weaker than occurred during the Great Recession of 2008-09. A more interesting question revolves around the conditions required to increase the average price to levels that would be considered profitable for most producers. If overall demand remains weak, prospects of very small year ending stocks would likely be required to move averages above $4.00 and $10.00 for corn and soybeans, respectively, which would be helpful but would not represent a return to general profitability. However, there are factors that could improve the demand environment in the year ahead. These include crop production problems in other parts of the world that would extend the demand for U.S. corn and soybeans, a realignment of currency exchange rates that would favor U.S. corn and soybean exports, and policies that enhance the domestic demand for corn and soybeans. Recent dryness that poses, or may pose, some threat to the Malaysian palm oil crop and the second-season Brazilian corn crop are examples of production problems that would enhance export demand. The current biofuels policy that is supporting biodiesel production also has the potential to support soybean oil consumption at a higher level. It is interesting that the futures markets may already be anticipating some of these developments, as the markets are currently projecting 2016-17 marketing year average prices of about $3.70 for corn and $9.40 for soybeans.”

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