Ag officials, experts discuss farm trends

Farmers are nowhere near the depths of the 1980s farm crisis and farm income is actually up—but only thanks to federal payments. Signs of farmer distress are showing up in other figures: investment in equipment is down, farmer debt is up, and so is borrowing against land—both worrying trends.

That was the message of two closely related presentations at a Sept. 24 event at the University of Missouri in St. Louis titled, “Trade, Floods and the Future.” The presenters discussed changing trade patterns and suggested they might be permanently altered, no matter what happens with ongoing trade talks between the United States and China.

The first talk was given by Warren Preston, deputy chief economist of the U.S. Department of Agriculture. The second, by Patrick Westhoff, director of the Food and Agricultural Policy Research Institute at UMSL, covered similar ground from a slightly different perspective. The talks were followed by two panel discussions.

Farm income up, but …

Preston’s “Perspectives on U.S. Agriculture” included some eye-opening statistics on farm productivity and income. The USDA updated its farm income estimates from March and found a picture that Preston labeled “cautiously optimistic.”

From 1960 through 2019, USDA figures show that U.S. corn production has increased by 455%, soybeans by 1,190%, rice by 225%, and wheat by 215%. Recently, real prices have consistently dropped as production outstripped demand. Both global production and consumption are at near-record highs, Preston said, with large stocks overhanging the market.

While U.S. ag exports to the rest of the world were slightly up overall, he said, exports to China were not surprisingly down significantly, mostly due to the drop in soybean exports. China took a total of 6% of all U.S ag exports, versus 16% in 2012.

The USDA estimates that real net farm income increased by $88 billion in 2019—but not if federal farm aid payments tht include the market facilitation payments are subtracted. Those federal payments to cushion farmers from the effects of the tariff wars have propped up farm income to $19.5 billion, up 42% from last year. Some of these payments were carried over from 2018.

At about $2.7 trillion, said Preston, farm equity is holding steady. Farmers, though, say they want trade, not aid. The drop of 20 million tons in Chinese imports of soybeans this year due to ASF roughly corresponds to the drop in U.S. soy exports, Westhoff said.

A July report by the International Monetary Fund forecasted global growth at 3.2% in 2019, picking up to 3.5% in 2020—0.1 percentage point lower than in the April world economic projections for both years. Preston cited United Nations estimates that world population continues to grow, but more slowly. A July report by the International Monetary Fund said global purchasing power will decline by a cumulative $1.7 trillion from 2019 through 2022, compared to its April forecast. A high U.S. dollar also affects farm exports.

Farmer distress

Major crop prices are flat or declining, said Preston. More farmers are borrowing against assets, including their land, to fund operating expenses. That trend fuels debt growth, which Preston called a “worrying trend.” The level of farm debt is not yet up to 1980s levels, but it’s edging closer. Total farm debt stands at about $400 billion, up 1.6% from last year.

The income increases also partly reflect belt-tightening—i.e., lower investments in new machinery and other farm assets. While that’s a prudent short-term strategy, said Preston, it’s not sustainable in the longer term. “How long can farmers keep older machinery going?” he wondered. The cutbacks also affect farm equipment suppliers.

Farm production expenses are expected to stabilize in 2019, at about $346 billion. The farm debt-to-equity ratio stands at 15.6%, and the debt-to-asset ratio at 13.4%. While these do not approach the 22% debt levels of the 1980s farm crisis, he said they are worrying.

African swine fever

One driver of U.S. ag export woes has been the African swine fever devastating China and now spreading throughout southeast Asia—it has been detected in South Korea, Russian and, recently, in the Philippines.

ASF is deadly to pigs and can kill within 14 days, although it does not affect humans even when consumed in meat contaminated with it. Because it is one of the most complicated viruses known, any vaccine is years away at best. Although North America has so far been spared, it is present in the European Union.

Pork is the most commonly consumed meat in China and is considered a national staple. The disease has drastically reduced Chinese demand for oilseeds and feed ingredients—and would have done so even in the absence of a tariff dispute.

Some American pork is moving to China despite tariffs and did before the exemptions. Yet Preston cautioned those suggesting that ASF could be a huge boon to U.S. pork producers. This is because the Chinese prefer to buy whole carcasses and process them themselves, partly in order to keep small processors going, partly because the Chinese cold-chain supply system is “underdeveloped,” he said. The U.S. pork processing system is not set up to provide a lot of whole carcasses. U.S. exporters are used to processing pork themselves into smaller units, and not many chiller containers can handle whole carcasses.

Exemption for soy, pork buys

Nevertheless, on Sept. 13, the Chinese news agency Xinhua announced that the Chinese government was allowing certain state agencies to make several tariff-free soy and pork buys from the U.S. The same day, it directed those agencies to buy 600,000 tons of U.S. soybeans.

The move was described as a good will gesture as trade talks continue with the U.S., but China is also desperately short of pork in the wake of ASF. China owns Smithfield Foods, the largest pork producer in the U.S.

Several speakers referred to the unreliability of official Chinese statistics on the swine fever crisis, although more accurate news is leaking out. It’s possible, said one speaker, that up to 30 percent or even more of the total Chinese swine herd could be lost.

Even if ASF has peaked—a risky assumption—it will take China up to 12 years to rebuild its herds.

Corn, soybean crop overhang

Preston noted that the March corn crop estimates by USDA’s National Agricultural Statistics Service and an “August surprise” corn estimate provoked widespread disbelief and criticism, but those figures now appear to have been vindicated. Despite the spring floods and late planting, corn growers had a mostly favorable growing season and the result is a projected 13.8-billion-bushel corn crop—the sixth highest ever, although those estimates will be revised further in October and November.

Westhoff’s presentation, titled “Storm Clouds All Around,” went over some of the same ground but focused more on Missouri. Westhoff forecast a 2020 crop of 92 million acres of corn and 84.5 acres of soybeans, resulting in more production and overhang.

The soybean crop dropped from 4.5 billion to 3.6 billion bushels year-over-year but still wound up as the sixth-largest soybean crop ever, with ending stocks of almost a billion bushels, which Westhoff called “ridiculously high.” “What does the market know that we don’t know?” he wondered. In a panel discussion, Craig Childs, vice president of Agri Services, said the soybean carryout could be a real concern if trade talks don’t progress.

He said gross domestic product growth is slowing in most countries and that most experts expect a recession in 2020 or 2021. Another concern is U.S. spending, with “trillion-dollar deficits as far as the eye can see.”

Westhoff noted that after the 2007 recession, per-capita U.S. meat consumption declined for the first time since the Great Depression. That led to speculation that the decline might be permanent in the face of changing dietary trends, but meat consumption has since rebounded past 2007 levels.

Westhoff said the increase in U.S. farm income partly reflected better cost-control measures by farmers, as well as the market facilitation payments. He said 2020 estimates for net cash income for farmers is slightly down, while net farm income, which includes inventory, could be slightly up.

Ethanol challenges

Westhoff brought up the issue of the small refinery exemptions from the ethanol blending mandate. In early August, the Environmental Protections Agency granted 31 controversial waivers allowing small refiners to forgo blending requirements of the Renewable Fuels Standard. “The Trump administration’s approval of 31 refinery exemptions from the Renewable Fuel Standard is just devasting news for our industry,” said Iowa Renewable Fuels Association Executive Director Monte Shaw in a press release at the time. Geoff Cooper, president and CEO of the Renewable Fuels Association, said the decision came as a “total shock.”

In a panel discussion, Matt Amick, director of industry elations for the Missouri Corn Growers Association and Missouri Corn Merchandising Council, said the top three markets for U.S. ethanol are Canada, Brazil and India—with growth potential in India. Many other countries are importing more ethanol, including the Philippines and Indonesia.

A panel discussion on this season’s flooding challenges to ag supply chains said the floods have led to more “forward storing” of commodities.

David Murray can be reached at [email protected].