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 Johanssonindicated 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 Outlawpointed 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.”
* Fifth District- Richmond– “Several District farmers reported that they have made limited capital purchases in recent weeks and project little change for the next six months. According to agribusiness contacts, input prices varied since the previous report. Chemical prices grew modestly while fertilizer prices decreased slightly and seed prices remained elevated. Crop prices stabilized on balance.”
* Sixth District- Atlanta– “Agricultural conditions were mixed, while most of the District remained drought free, there were some areas in Florida, Georgia, and Louisiana categorized as abnormally dry. Due to excessive rain and flooding earlier in the year, the USDA designated several counties in central and southern Florida as primary natural disaster areas. Florida’s orange crop forecast increased from the previous month but continued to be lower than last season. 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– “Spring arrived early in much of the District, allowing fieldwork to begin. Corn, soybean, and wheat prices moved up, and fertilizer prices and land rents moved down. However, these changes were not large enough to appreciably improve crop farmers’ earnings prospects. Cattle prices edged higher, while hog and dairy prices were somewhat lower. The drop in dairy prices was large enough that many operations now face losses unless they had made forward contracts at higher prices.”
* Eighth District – St. Louis– “Still facing low crop prices, farmers plan to increase acreage to cover as much of their fixed costs as they can. District corn, cotton, rice, and soybeans acreage is expected to be higher last year. Concerns about December flooding impacting the winter wheat crop have been unfounded so far, as more than 93 percent of the crop is rated fair or better.”
* Ninth District- Minneapolis– “District agricultural conditions remained weak. A contact in eastern Montana reported that less- profitable farms were leaving the business, and more exits were expected. Reports indicated that District farmers intended to plant fewer acres of wheat but more acres of corn in 2016 compared with last year, and an early forecast pointed to a strong growing season in parts of the District this year. Logging in northern Wisconsin was slowed by a warm winter that made the ground too soft for equipment. Farm prices fell in February 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– “The District farm economy remained subdued since the previous reporting period, though crop prices improved slightly and growing conditions were mostly positive. Crop prices increased moderately in March, but were generally below previous-year levels. 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. Growing conditions for winter wheat in Oklahoma and Kansas were primarily rated between fair and good, but conditions deteriorated slightly from the previous month due to somewhat warmer weather and relatively little precipitation. Despite a brief rebound in March, livestock prices were significantly lower than a year ago, and profit margins at cattle feedlots remained soft, as livestock prices have decreased more than input costs over the past year.”
* Eleventh District- Dallas– “Row-crop farmers were busy preparing fields or planting, and the USDA Prospective Plantings report showed acreage increases in Texas for cotton, corn and soybeans this year versus 2015, and acreage declines for sorghum and wheat. Production prospects for 2016 crops are quite positive in light of healthy soil moisture and a favorable weather outlook. While crop prices generally increased slightly over the past six weeks, they remained low and contacts continued to mention stressful financial situations among many producers in the region. On the cattle side, prices increased over the reporting period, largely seasonally, and beef production was higher than a year ago.”
* Twelfth District- San Francisco– “Activity in the agriculture sector picked up over the reporting period. Growing conditions in California and other parts of the District have been bolstered by ample winter rainfall that has partially alleviated the challenges created by sustained drought. A seasonal improvement in domestic demand for timber products somewhat offset weaker foreign demand. However, contacts reported that the elevated dollar continued to weigh down exports for most products. Domestic sales of produce strengthened. Despite weak exports, herd costs fell, reducing losses in that sector. Contacts reported that capital spending plans were focused on productivity enhancements and replacing equipment rather than capacity expansion.”
The FT article noted that, “The approaching caravan of tractors repeats a dynamic seen across commodities markets. Despite a collapse in prices, miners, oil companies and farmers have been slow to restrain output, prolonging their pain.
“When corn doubled between 2006-12, topping $8 a bushel at their peak, farmers banked cash. Prices are now about $3.50.
“‘At the end of this year, the financial reserves built up in that profitable period will be pretty much gone. Then we’ll being facing some really tough decisions,’ says Gary Schnitkey, a professor of farm management at the University of Illinois.”
With respect to production costs, Mr. Meyer pointed out that, “In Minnesota, total expenses for growing corn dropped 8 per cent between 2013-15 to about $750 per acre, according to the Center for Farm Financial Management at the University of Minnesota. On highly productive acreage in central Illinois, total non-land costs for corn will be $550 per acre this year, down from $615 in 2013, according to Prof Schnitkey.”
Today’s article also stated that, “Stephen Gabriel, chief economist at the Farm Credit Administration, which oversees the credit system, says farm lending institutions remained ‘very well capitalised.’
“For farmers, ‘input prices will drop; they’ll start working more efficiently.’ Mr Gabriel says. ‘But in the meantime there definitely could be some pain. We’re expecting to see some credit issues arise over the next few years in the grain sector in the Midwest.'”
Mr. Meyer also pointed out that, “Farmers are planting corn amid a darkening financial picture. In central Illinois, home to some of the best soil on earth, Prof Schnitkey forecast a net loss after land costs of $36 per acre from corn this year with corn prices higher than they are today.”
Meanwhile, Jacob Bunge, in an article today at The Wall Street Journal Online, quoted Cargill chairman and CEO David MacLennan as saying, “Barring weather events, we don’t anticipate a near-term improvement in market conditions for agriculture.”
The Journal article pointed out that, “A global surplus of major crops has kept prices low, pushing U.S. farmers’ incomes to the lowest level in more than a decade and forcing them to scrutinize spending on seeds, sprays and tractors, which is posing a challenge for Farm Belt mainstays like DuPont Co., Monsanto Co. and Deere & Co.”
Bloomberg writer Nick Turner reported yesterday that, “Wal-Mart Stores Inc., the world’s largest retail chain, will sell 100 percent cage-free eggs in the U.S. by 2025, joining an industrywide shift toward a practice that’s seen as more humane.
“As part of the transition, Wal-Mart and its Sam’s Club warehouse chain will require that its egg suppliers adopt United Egg Producers rules or an equivalent set of standards, the retailer said in a statement Tuesday. Compliance will be checked annually by a third party.
“Wal-Mart sells more groceries than anyone else in the U.S., and its decisions typically sway the rest of the industry. The Bentonville, Arkansas-based company has offered cage-free eggs since 2001, though not exclusively.”
Mr. Turner noted that, “The challenge for Wal-Mart is transitioning to cage-free eggs while keeping a lid on prices, something the chain said it can do with the 2025 deadline.”
DTN special correspondent Elizabeth Williams reported this week that, “Cautious — that’s what the farmland brokers and rural appraisers termed their mood last week at the spring meeting of the Iowa Realtors Land Institute. It may look like business as usual as planting begins, but beneath the surface, financial stress is building in farm country, Iowa Concern Hotline director Margaret Van Ginkel with Iowa State Extension would add.
“The hotline, established in 1985 during the farm financial crisis, has seen an increase in call volume this spring. ‘Questions concerning tax consequences of selling machinery or land, what if they stop making payments on machinery, worries about whether a farm operation can support two or three generations. The vulnerability is there,’ Van Ginkel said.”
The DTN article explained that, “Iowa is a bellwether state for agricultural stress, given its rapid run-up in farm incomes, land values and cash rents during corn’s 2008-12 glory years. Some lenders think the commodity fall will be harder here. One sign is that Land Institute members think the state’s farmland prices tumbled 5% on average over the last six months, according to its March 1 survey. Since 2015, Iowa land values have fallen 8.7% across the state with top-quality cropland decreasing from $9,516 per acre to $9,146, the survey found.”
Ms. Williams also noted that, “Cash rents have softened a little, Iowa farm managers and rural appraisers reported at their statewide meeting, but rents are still strong in some areas. Waverly banker Willemssen said cash rents in northeast Iowa are still in the $300- to $400-per-acre range.”
Meanwhile, a news release from North Dakota State University this week stated that, “North Dakota land values declined for the second consecutive year in 2015. This follows an 11-year period (2003 to 2014) in which cropland values averaged an annual increase of 15 percent, the strongest sustained run-up in cropland values in the past 100 years.”
The release added that, “Based on the survey, North Dakota average cropland values declined about 4 percent during 2015. Swenson noted that a report by the North Dakota Chapter of the American Society of Farm Managers and Rural Appraisers indicated a greater decline, 9 percent, for 2015.”
With respect to the implications of the tightening financial outlook, Reuters writers Tom Polansek and Karl Plume reported this week that, “North Dakota farmer Randy Thompson plans to apply 30 percent less nitrogen fertilizer to his corn this year to save money in the face of crashing crop prices.
“In Minnesota, Andy Pulk is trucking crop nutrients to his farm from 350 miles (563.3 km) away because he found a better price than his local cooperative could offer. He has also halted purchases of machinery.”
The article noted that, “With more acres than ever before likely to be planted with soybeans and corn in the U.S. Midwest this year, companies including seed maker Monsanto Co and fertilizer seller CF Industries Holdings might have expected a windfall for earnings.
“But with grain prices near five-year lows and farm incomes at their lowest levels since 2002, growers are tightening their belts by reducing spending on everything from fertilizer to seeds to chemicals.”
And, Jacob Bunge and Lisa Beilfuss reported today at The Wall Street Journal Online that, “Monsanto said profit tumbled in its latest quarter as the St. Louis-based maker of Roundup weed killer continues to grapple with an unfavorable agricultural market.
“The company is struggling with a sharp downturn in the U.S. farm economy and pressures in overseas markets. U.S. farmers’ incomes are projected to fall to their lowest level since 2002 after grain and oilseed prices sagged for three straight years due to a string of bumper harvests. The strength of the U.S. dollar has meanwhile made Monsanto’s products more expensive overseas.”
The Journal writers pointed out that, “In its latest quarter, Monsanto’s revenue from seeds and genomics, its biggest business, fell 8.6% as sales of most seed types declined. Sales in its agricultural productivity segment slid 30% to $715 million.”
Nathan Kauffman, the Assistant Vice President and Omaha Branch Executive at the Federal Reserve Bank of Kansas City, indicated in a recent article (“Mounting Pressure in the U.S. Farm Sector“) that, “U.S. farm income has continued to decline, and is expected to remain low as planting season approaches across the country. The USDA projects real net farm income to be slightly less than a year ago; that projection would mark the second-lowest farm income total in more than 30 years (Chart 1). Prolonged weakness in the farm sector primarily has been driven by several consecutive years of low crop prices and persistently elevated input costs, while recent weakness in the livestock sector also has been a factor.”
The Fed update pointed out that, “The need for financing, and the potential for future financial stress, has continued to increase throughout U.S. farm country. Loan demand in the Tenth District is expected to increase again in the first quarter of 2016, which would be the third consecutive year in which lending needs in the farm sector increased relative to the previous year (Chart 3). Similarly, bankers responding to the fourth quarter survey indicated they expect loan renewals and extensions to continue to accelerate. Conversely, the rate at which loans are repaid at agricultural banks in the District was expected to soften further.
“Persistently strong loan demand at agricultural banks has been coupled with reports of increasing use of USDA Farm Loan Programs through the Farm Service Agency (FSA). From 2013 to 2015, FSA loan volumes increased more than 40 percent (Chart 4).”
The Fed update also noted that, “Despite strong loan demand and an increase in the federal funds target rate in December, interest rates on most farm loans have remained historically low. In fact, interest expenses for U.S. corn producers accounted for only 9 cents per bushel of production in 2014, the latest year for which data are currently available.”
Meanwhile, a recent update by Kevin Patrick, Ryan Kuhns, and Allison Borchers at Choices Online (“Recent Trends in U.S. Farm Income, Wealth, and Financial Health“) stated that, “The continued drop in farm sector income is expected to place downward pressure on farm asset values, which had appreciated during the previous several years. The resulting drop in liquidity from multiple years of lower income is also expected to increase the need for sector borrowing relative to the 2009-2013 period. As a result, the USDA predicts a decline in sector equity and an increase in leverage, which signals the potential building of financial stress within the farm sector. A portion of U.S. farm businesses are highly leveraged and are at increased risk of default. While measures of financial health are worsening relative to the profitable 2009-2013 period, they remain better than historic averages.”
And Rick Barrett reported in yesterday’s Milwaukee Journal Sentinel that, “Carrie Mess, like most dairy farmers, is losing money every time the cows are milked on her farm near Watertown.
“As farmers gear up for spring planting, those who sell crops on the commodities markets stand to lose buckets of money from low prices that are beyond their control.
“Simply put, what many farmers are paid for milk, grain or livestock now isn’t enough to cover their expenses. They’re taking out loans and tapping savings to remain in business, going to work every day knowing that it’s costing them money.”
With respect to other potential impacts of a slumping U.S. ag economy, the AP reported today that, “Kansas farm co-ops are feeling pressure to merge as shrinking farm incomes have producers looking for ways to cut their costs.
“In about six weeks, Farmers Cooperative Elevator in Garden Plain will vote on whether to merge with co-ops in Anthony and Kiowa. Andale Farmers Co-op voted in December to merge with Kanza Co-op, a large operation based in the Pratt County town of Iuka.”
A news release yesterday from the USDA’s National Agricultural Statistics Service (NASS) stated that, “U.S. corn growers expect to plant 93.6 million acres to corn this year, according to the Prospective Plantings report released today by [NASS]. This is the first increase in corn planted acreage since 2012 and, if realized, will be the third largest corn acreage since 1944.
“Driven by the expectations of higher returns in 2016 compared with other crops, corn growers in 41 of the 48 contiguous states expect to either maintain or increase the number of acres they plant to corn. Growers in Illinois, Iowa, Kansas, and North Dakota expect to increase their corn acreage by 400,000 or more acres in 2016.
“In contrast, U.S. soybean growers expect to reverse the recent trends, which saw several record-high years. In 2016, growers expect to plant 82.2 million acres to soybeans, a less than one percent decrease from 2015.”
Jesse Newman reported yesterday at The Wall Street Journal Online that, “Struggling U.S. farmers plan this year to sow their fields with extra corn in a high-stakes gamble to counter sliding prices by selling even more of the grain…Many domestic farmers are grappling with the fallout from three years of declining crop prices and trying to grow their way out of the industry’s slump, even as farm income is expected to drop for a third year, with the forecast $54.8 billion less than half the record in 2013.”
The Journal article noted that, “Corn prices tumbled to a nearly three-month low, dropping 4.2% to $3.51 ½ a bushel.”
Ms. Newman also pointed out that, “The agency’s quarterly report on U.S. grain inventory said corn stockpiles on March 1 totaled 7.81 billion bushels, up from 7.75 billion bushels on the same date last year, and the highest in nearly three decades.”
Christopher Doering reported in today’s Des Moines Register that, “Agriculture remains mired in a stubbornly long period of low commodity prices that has left some producers struggling to cover their costs and forced many to cut back on inputs such as seed and fertilizer to save money. Other farmers have restructured loans or refinanced them against other equity resources so they have enough cash to operate.”
Iowa State University agricultural economist Chad Hart noted yesterday that, “Given trend yields of 168 bushels per acre for corn and 46.7 bushels per acre for soybeans, the projected acreage points to another round of massive crops. Corn production would reach 14.38 billion bushels, which would be another record corn crop. Soybean production would approach 3.8 billion bushels, which would be the 3rd largest soybean crop in history. And for markets already dealing with large supplies, these prospective plantings do not help. So the markets will be looking for Mother Nature to slow the supply train down.”
University of Illinois agricultural economist Darrel Good spoke about the USDA reports in a radio interview yesterday:
And, Dr. Good and Scott Irwin, also of the University of Illinois, held a detailed webinar looking into the yesterday’s USDA reports this morning.
Meanwhile, the Associated Press reported yesterday that, “Inflation-adjusted farm incomes in Minnesota fell to their lowest point in 20 years in 2015 despite record crop yields and this year’s outlook is also grim, according to an annual analysis released Thursday.
“A major factor was the continued decline in commodity prices, the report from the Minnesota State Colleges and Universities system and University of Minnesota Extension said. Unlike 2014, when livestock producers had a very good year, both crop and livestock farms struggled last year.”
The USDA’s National Agricultural Statistics Service (NASS) released its monthly Agricultural Prices report yesterday, which noted that, “The corn price, at $3.57 per bushel, is down 9 cents from last month and 22 cents below February 2015.”
The NASS report added that, “The soybean price, at $8.51 per bushel, decreased 20 cents from January and $1.40 from February a year earlier.”
Donnelle Eller reported on the front page of the business section in today’s Des Moines Register that, “Iowa farmland values have dropped nearly 9 percent over the past year, reflecting lower farm income and commodity prices, a farm real estate group said Wednesday.
“The Iowa Realtors Land Institute farmland survey through March shows the average value of cropland fell to $6,732 an acre, 8.7 percent lower less than a year ago.”
Ms. Eller explained that, “It’s a 22.5 percent decline from 2013, when values climbed to a record $8,690 an acre and U.S. income climbed to $123 billion.”
The Register article noted that, “‘Farm incomes have been dropping, but land values haven’t dropped to the same degree,’ said Steve Bruere, president of Peoples Co., a Clive brokerage and farm management business.
As commodity prices falter and profit margins remain thin, U.S. agricultural producers will be eager to minimize costs of production in 2016. News reports have indicated that some producers are already cutting back on spending for seed and fertilizer.
With respect to interest rates, Binyamin Applebaum reported in today’s New York Times that, “Janet L. Yellen, the Federal Reserve chairwoman, said on Tuesday that the United States economy remained on track despite a rough start to the year because the drag from weak growth in other countries was being offset by lower borrowing costs.
“Ms. Yellen told the Economic Club of New York that the economy ‘had proven remarkably resilient,’ and that the Fed expected better days ahead. She said the Fed still intended to pursue a careful, patient course toward higher interest rates as the economy improved.
“The cautious tone of her remarks, however, suggested no rate increase was likely at the Fed’s next meeting, in April, shifting the eyes of Fed watchers to its subsequent meeting in June.”
The Times article explained that, “The Fed’s policy-making committee indicated after its most recent meeting, this month, that it now expected to raise rates by about half a percentage point this year.
“That was half as much as the Fed had predicted at the beginning of the year.
“Ms. Yellen attributed the deceleration on Tuesday to a judgment by Fed officials that somewhat lower rates were necessary to maintain steady growth.”
And David Harrison and Michael S. Derby stated in today’s Wall Street Journal that, “Global economic and financial uncertainty poses risks to the U.S. economy and justifies a slower path of interest-rate increases, Federal Reserve Chairwoman Janet Yellen said in remarks that suggested little appetite to raise rates when officials meet next month.”
Jesse Newman reported yesterday at The Wall Street Journal Online that, “U.S. farmers are expected to plant more corn and soybeans this year even as their storage bins remain stuffed with rising inventory, according to analysts surveyed by The Wall Street Journal.
“The U.S. Department of Agriculture on Thursday will release two closely watched reports on domestic crop stockpiles and farmers’ planting intentions, against a backdrop of historically high global supplies and pressure on U.S. exports caused in part by the strength of the U.S. dollar.”
Ms. Newman noted that, “Analysts expect USDA to estimate that farmers will plant 90.05 million acres of corn, up about 2% from nearly 88 million last year.
“The USDA likely will peg soybean acres at 82.95 million acres, up 0.4% from 82.65 million last year, while all-wheat acreage likely will be estimated at 51.66 million acres, down 5% from 54.64 million in 2015, according to the survey.”
With this background in mind, Bloomberg writer Alan Bjerga indicated yesterday that, “Illinois farmer David Erickson admits that what he and many U.S. farmers are about to do doesn’t seem to make much sense. With bulging stockpiles of corn and soybeans left over from last year’s harvest, they’re planting more in 2016 — even though the crops probably won’t be profitable.”
The Bloomberg article noted that, “After record prices in 2012 sparked a boom in output, corn and soybeans in the Midwest now fetch less than the cost to produce them, and U.S. farm income is headed for a 14-year low. While the market has improved in recent months, researcher AgResource Co. still estimates a $50 loss for every acre sown on average. As they seed more, growers have cut spending and hope better-than-normal yields will help them at least break even.
“Farmers in the U.S., the world’s biggest grower, will expand corn planting to 89.998 million acres, up 2.3 percent from a six-year low in 2015, and soybeans will be sown on 83.07 million acres, the second-most ever, a Bloomberg survey of 33 analysts showed. The U.S. Department of Agriculture will disclose its planting and stockpile estimates on Thursday.”
Mr. Bjerga added that, “With few appealing options, David Seil chose to expand corn planting on his 1,300-acre farm near Gowrie, Iowa. Rather than sacrifice productive land by using it as pasture for his cattle, he’s cutting back on spending for seed and fertilizer and hoping that weather damages crops somewhere else so that prices go up.”
Pat Westhoff, the director of the Food and Agricultural Policy Research Institute at the University of Missouri, indicated in a column on Saturday that, “In the 1980s, farm financial stress was severe. Farm income was low, debt rose to unsustainable levels and a wave of bankruptcies contributed to a crash in farmland values.
“This is not the 1980s. The ratio of farm debts to farm assets is much lower now than it was in 1985. Interest rates are far lower, and very few farms are behind on debt payments.
“However, these are difficult times for many U.S. farmers and ranchers.Net farm income is less than half the record level of 2013. Prices are down for almost every major farm commodity, from corn, soybeans and wheat to cattle, hogs and milk.”
Dr. Westhoff added that, “Each year, our institute puts together a 10-year outlook for the U.S. farm economy. Our March 2016 outlook tells the same story we’ve been telling for some time — more tough times are ahead.
“After peaking at $6.89 per bushel for the crop harvested in the drought year of 2012, corn prices have averaged less than $4 per bushel for the past two years. We expect more of the same. Similar stories hold true for soybeans, wheat, sorghum, cotton, rice and almost every other major crop grown in this part of the country.”
Saturday’s column also noted that, “[R]eductions in production costs and the increase in [federal government] payments are not nearly enough to offset the decline in sales receipts. That’s why net farm income has decreased so sharply.”
In a related item regarding the 1980s, DTN Farm Business Advisor Danny Klinefelter noted in an article this week that, “Financial watchdogs are still smarting from the 2008 financial crisis and don’t want to be behind the curve this time. They’ve imposed stricter risk-based capital requirements, more burdensome documentation and more proactively aggressive monitoring. Risk can originate from weaker borrower financial condition, more carryover debt, concentration in the lender’s portfolio and increased counter-party risk (say when a vendor or supplier fails, causing a domino effect on customers).
“Fortunately — as opposed to the 1980s farm financial crisis — ag banks and the Farm Credit System haven’t been responsible for overly aggressive lending. Many have required down payments as large as 50% on farm mortgages. Much of what caused land values rising above amounts lenders would finance has been the result of borrowers pledging other debt-free assets to secure the loan; they’ve used their own money (liquidity) to pay prices above the lendable value of the land purchased.”
Meanwhile, Reuters writers Tom Polansek and Karl Plume reported today that, “Three years into a grain market slump, U.S. farmers are set to plant more corn, taking a calculated gamble that higher sales will help them make up for falling prices without triggering even more declines.
“Forecasts suggest that at current prices growers will be able to cover their variable expenses such as seed and fertilizer. By planting more and scrimping on everything from labor to crop chemicals, farmers hope to cover a portion of hefty fixed costs, including land rents.
“Their strategy marks a reversal from the last time that prices for corn, soybeans and wheat fell for three years running in mid-1980s. At that time, farmers cut production and prices began rising.”
The Reuters article added that, “Barring a weather disaster, more corn planted means a bigger harvest that will add to massive global crop inventories that have kept prices below break-even levels. The swollen stockpiles also make any price recovery unlikely even if U.S. output were to decline.
“With no rebound in sight, cranking up production might be the best shot U.S. farmers have at balancing their books in a falling market, economists say.”
DTN Markets Editor Katie Micik reported today that, “Farmers’ feelings about the ag economy continue to fade while agribusinesses’ sentiment took a steep dive, according to the latest results of the DTN/The Progressive Farmer Agriculture and Agribusiness Confidence Indexes.
“The latest reading of the DTN/The Progressive Farmer Agriculture Confidence Index came in at 91.5, the lowest since DTN began surveying farmers in 2010.
“That compares to an index value of 92.7 in December and 98.8 in March 2015. An index value of 100 is considered neutral, while higher values indicate optimism and lower values reflect pessimism.”
The DTN article stated that, “Experts estimate the average Kansas farmer’s net income for 2015 will see a loss of $30,000. The forecast is for more of the same in 2016.”
Ms. Micik added that, “The Agribusiness Confidence Index came in at 83.4, down more than 15 points from December’s 98.3 reading and more than 21 points from the previous March’s 104.7 reading.”
University of Illinois agricultural economist Gary Schnitkey indicated recently at the farmdoc daily blog (“Downward Pressures on 2016 and 2017 Cash Rents“) that, “Cash rents on professionally-managed farmland decreased in 2016. In 2017, pressures to lower cash rents will intensify if commodity prices do not increase. In this article, a table is presented that summarizes cash rents for professionally managed and ‘average’ farmland in Illinois for 2014 through 2016. The 2016 cash rents for ‘average’ farmland is a projection.”
In his farmdoc update, Dr. Schnitkey explained that, “Downward pressures will be placed on 2017 cash rents, particularly if commodity prices remain low. Professional farm managers were asked how much they anticipated cash rents to change in 2017 if conditions remain the same as they are currently. When asked, corn prices were near $3.60 per bushel and soybean prices were near $8.70 per bushel. Of the farm managers responding to the survey, 41% expected cash rents to decrease between $25 and $50 per acre while 50% expected decreases in the $5 to $25 per acre range. Only 9% expected cash rents to remain the same, and none expected rents to increase. These expectations point to larger increases in 2017 than in 2016.
“Much of the reason for this downward pressure is because farmers are projected to have losses in 2017 on cash rent farmland.”
Recall that earlier this month, The Des Moines Register reported that, “Faced with declining profits, some Iowa farmers are defaulting on cropland rents — a largely unheard of move given the intense competition for the state’s fertile farmland and a sign that financial pressure and debt are mounting.
“With farm real estate debt across the United States at its highest levels since the farm crisis years of the early ’80s, farmers are increasingly nervous about trying to turn a profit while paying sky-high rents.”
In a related item, a news release earlier this week from AgriBank stated that, “Commodity prices are the greatest challenge facing agricultural producers in 2016, according to a poll of Farm Credit directors from America’s heartland.”
Meanwhile, DTN Special Correspondent Elizabeth Williams provided an interesting look at how some producers are coping with lower commodity prices in an article from yesterday (“The Hunt for Profits“).
Ms. Williams stated that, “Tumbling commodity profits have producers scurrying for ways to pump up their bottom line. After controlling costs and better marketing, conventional farmers are looking at other alternatives to bring in extra cash. Organic crops perhaps?”
The DTN article added that, “You can get $8.50 per bushel for organic corn (when conventional corn is selling for $3.80). Organic soybeans can bring $20 per bushel and organic wheat is currently priced around $8 per bushel, according to the Agricultural Marketing Service’s latest bi-weekly report. Those prices have plunged significantly since 2014, but still appear enough to encourage more organic acres.
“Compared with conventional farming, the cost of production for organic commodities can run as low as $5 to $10 per acre more, reported Lynn Clarkson of Clarkson Grain, which buys organic grain and oilseeds, in Cerro Gordo, Illinois. (However, total economic costs of organic compared with conventional production were roughly between $83 and $98 per acre higher for corn, a national 2015 USDA study estimated.)”
The DTN article also pointed out that, “Because organics are still a niche market, you should price your grain or oilseed before you plant it. There are several companies that work on a broad scale such as Clarkson Grain, Scoular Grain, SunOpta and SK Food. You can contact the Organic Trade Association at www.ota.com for resources in your area.”
Financial Times writer Shawn Donnan reported today that, “Barack Obama’s historic visit to Cuba this week has been rich in symbolism, but even as the president has lifted restrictions on American companies to do business with the Caribbean nation, one key constituency remains frustrated: the powerful US agriculture lobby.
“Agriculture-related exports to the island, which sits just 90 miles off the Florida coast, have been allowed under US law since 2001 and with Cuba importing 80 per cent of its food, Washington is eager to penetrate a market officials say is worth $2bn a year.”
The FT article explained that, “But after peaking at more than $710m in 2008, US agricultural exports to the country have been steadily falling ever since. Last year they were worth just $180m, according to US trade statistics, giving the US less than 10 per cent market share and leaving it behind Brazil, the EU and Argentina as a source for food in Cuba.
“In an effort to turn that round, the US and Cuba on Monday are set to agree to increase their co-operation on agriculture and improve their technical links. The US is also due to lift restrictions on growers using special research and marketing bodies to pitch their products in Cuba.”
Today’s article pointed out that, “However, the steps do not address the financial restrictions that remain on Cuban buyers of US agricultural products and are thus unlikely to do much in the short term to increase US exports to the Caribbean island.
“Although Cuban buyers have since January been able to use US banks to finance purchases of other imports, those wanting to buy crops or meat produced in the US still have to pay cash up front or use a third-party bank.
“Such restrictions are codified into US law and cannot be lifted by executive order, the tool on which Mr Obama has relied to push through his change in Cuba policy. With the Republicans who control Congress determined not to remove the longstanding US trade embargo, that has left the Obama administration’s hands tied and the US agriculture lobby frustrated.”
In conclusion, today’s article stated that: “Mr Obama is making history and US chicken, pork, wheat and soyabean farmers are eager to take advantage. But for the time being, Republicans seem distinctly unwilling to play along.”
Finally got wifi today in Havana. Another reason to lift embargo! Headed to meeting w/AG Secr Vilsack about new Ag agreement btwn 2 nations.
“Peak Soil Index sales data through February 2016 shows six states it monitors below all-time records set in the last few years. But select counties in Wisconsin are averaging $4,361 per acre, only 2% below their high of a year ago; irrigated Nebraska farmland ran $7,055, about 4% below its 2015 peak; Minnesota crop counties averaged $5,641, off 8% from their 2014 peak; Illinois averaged $7,591, off 8% from its 2104 peak; and Indiana at $6,782 per acre recorded the steepest tumble, off 14% from its peak a year earlier.
The DTN article noted that, “In contrast, good-quality Iowa farmland averaged $8,123 per acre through February, according to Peak Soil. That’s down about 11% from the state’s all-time high in May 2013.”
Today’s article added that: “The shock to farmland markets typically lags farm incomes by several years: Studies by Iowa State University Economist (Emeritus) Mike Duffy show for every 2% drop in gross farm income, you’d expect cropland values to dip 1%. It’s worked to forecast nearly every period in modern history except the 1970s, when Duffy believes inflation expectations distorted land markets.”