Rabobank goes long on ag outlook

Is the ghost of Earl Butz finally being laid to rest by a combination of evolving global market conditions and farm support policies that are increasingly out of alignment with what benefits United States producers?

That question—not asked in those terms, of course—emerged from a series of presentations at Rabobank’s annual Fall Harvest Outlook, presented at an Oct 28 webinar. Rabobank’s experts took a long, philosophical view on whether targeting a few large crops for price supports continues to be the best way to support U.S. farmers as global competitors increase production and reduce America’s long-standing ag export advantages.

Stephen Nicholson, global sector strategist for grains and oilseeds with more than 30 years of experience in cash grain markets, went “back to fundamentals” to examine long-term agricultural cycles. He began with a chart tracking U.S. corn prices from 1900 that showed them gradually ratcheting up, interrupted by plateaus and pauses. Nicholson believes current corn prices are at Year 17 of a 25- to 30-year cycle. At a price cycle’s trough, operating capital declines and producers try to negotiate lower land rents.

Most year-over-year price declines on his chart are due to droughts or other supply shocks, he said. China currently holds most of the world’s corn and wheat stocks, and stocks-to-use ratios for all four major grains—corn, soybeans, rice, and wheat—are lagging behind the increase in stocks. This means that “despite record levels of production, supply is not keeping up with demand.” Nicholson sees break-even profit margins for U.S. producers being restored in the 2027-28 crop year.

Policy levers
Owen Wagner, senior grains and oilseed analyst, asked, “What policy levers can farmers pull?” While the notion may be unpopular at first blush, this could include allowing farmland values to fall—a message that could ultimately resonate with active farmers looking to grow. Wagner argued that farm supports are no longer counter-cyclical.

He referred to a long-standing theory that correlates sunspot activity to long-term agricultural “supercycles” from 1900 to the present. U.S. ag policies were designed to buffer cycles, he said, but have lost that function, especially after the 2008 farm bill.

Instead, since that year there has been a positive correlation between government support and market returns (excluding Market Facilitation Program and Coronavirus Food Assistance Program years). More support has been routed through insurance subsidies and ad-hoc payments. Programs like the Stacked Income Protection Program, originally designed for cotton producers, have come to shift from risk management to income support programs, and this distorts markets, he said.

Another effect of increased government support is inflation. Farmers usually say they prefer “trade, not aid,” and express dissatisfaction with mandates and payout treadmills, yet they have become more dependent on government aid, he said. Farm inflation is a side-effect of well-intentioned policies, Wagner added.

“Cash infusions into the ag economy have spurred inflation in ag production,” he said, noting that prices for seed, machinery, farmland, and rents have all exceeded the Consumer Price Index in recent years.

Wagner contrasted the fall in rural land values in the early 1980s, when ag safety nets were less generous, with how land values held steady in the early 2000s after a similar downturn. Active farmers, he said, must “go long” on farmland values. A 10% reduction in Iowa land rents would make its soybeans price-competitive with those of Mato Grosso in Brazil, he said.

Phosphates as proxy
Sam Taylor, senior analyst of farm inputs, examined the “dislocation” between farm costs and returns since 2020. He uses phosphate prices as a proxy for input costs. Overproduction of fertilizer kept input prices low until 2020. Then they were hit with “compounding” geopolitical events: Not only Russia’s invasion of Ukraine, but also the rerouting of ships from the Straits of Hormuz due to missile attacks by the Houthis, limits on phosphate exports by major producers, and nutrient subsidies in India.

From 2020 through 2022 there were “decent” returns on phosphates for farmers, but “since then it’s been terrible,” he said. Saudi Arabia stepped into the markets for a while to replace Morocco and Russia as suppliers, but it has since pulled back. If the U.S. didn’t export, it could be a self-sufficient “island” of MAP fertilizer. Farmers have cut back somewhat on phosphate use, contributing to the demand destruction he believes is necessary—but only about 15%, not the 25% that is needed.

Policy uncertainty                       
U.S. trade and tariff policy, including recently introduced port fees, has contributed to the uncertainty and input price escalations.

“There are a lot of headwinds, not just government subsidies but tariff uncertainties, that are wearing away our transportation advantage versus producers like Brazil,” according to Eric Gibson, a food and agribusiness analyst at Rabobank.

He said current risk management systems are not designed to help farmers navigate toward a more diverse, sustainable production. With their bias toward increasing yields as a benchmark, federal support programs have not kept pace.

There is not enough support for good farming practices including regenerative farming, and for forage and cover crops, Gibson said. Specialty crops like those produced in California are 55% insured, row crops are 89% insured, and forage crops are only 56% insured. California’s specialty value-added crops make up about 40% of the U.S.’s entire crop value of $130 billion. Programs like Agriculture Risk Coverage, Price Loss Coverage and base acres support “limit opportunity for other crops,” Gibson said.

In the Q&A period, several presenters noted that U.S. farm production was more diverse within living memory, with most farms spreading production—and risk—among livestock and several different crop types. Policies and incentives that guide farms back toward that diversity and risk reduction would benefit producers, presenters said.

David Murray can be reached at [email protected].