Farm income levels have been cut in half the last five years, yet the financial solvency of farm country remains strong. Speakers at the U.S. Department of Agriculture’s annual Agricultural Outlook Forum said how farmers and ranchers handle 2019 will be crucial in the ongoing economic situation in the countryside as the outlook does not seem to indicate improvement.
Robert Johansson, USDA chief economist, said falling commodity prices in recent years, for a host of reasons, have weighed on farm income. Over the past couple of years, the dramatic fall in net farm income seen in 2015 and 2016 seems to be leveling out to a lower level. The current expectation of farm income at $66 billion is a long way from the heights seen in 2013, he said. Looking forward, he doesn’t see things improving much, with net farm income expected to rise only slightly to $80 billion annually over the next 10 years.
“As farm income has fallen over the past few years, farm equity has also fallen, but it is only down about 5% from the peak in 2014, stabilized by high land values,” Johansson said. With low commodity prices, farmers have increasingly tapped into their real estate equity to provide operating funds.
Talk always comes back to the debt-to-asset ratio, which Johansson again noted is low, at just 15% for the sector, compared to more than 20% in the mid-1980s. Debt financing has been rising since 2013, however, and reached 25% of net farm income in 2018. “While still a long way from the peak of 60% in 1983, the growing share of farmers’ crop and livestock cash receipts that goes towards debt is likely to cause cash flow problems for producers without significant land equity,” Johansson stated.
A relatively stable majority of producers with sufficient assets and operating structure will remain solvent, as about one in 10 crop businesses and one in 15 livestock or dairy operations are highly leveraged (defined as debt-to-asset ratios of higher than 0.40).
Courtney Cowley, agricultural economist at the Kansas City, Mo., Federal Reserve Bank’s Omaha, Neb., branch, said if one were to pick a bright spot in the current agricultural economic picture, it would be that farmland values have remained relatively stable.
In her district, farmland demand has remained high while supply is low. Farmland may now be less attractive as an investment, but there remains high demand for good-quality farmland.
“I would have thought [farmland values] would have declined more, but they haven’t,” Cowley said.
In 2018, she saw that appraised theoretical values of farmland converged more with transactional values, which hasn’t been seen in the last 10 years.
Greg Lyons, economist with the USDA Economic Research Service’s farm income team, said the last several years have also brought increased consolidation. Larger farmers are more efficient in general, but they’re also able to handle more debt.
Johansson said there are many questions about policy, trade, weather and market information that could affect the outlook for 2019. Falling commodity prices are the result of continued production growth, which continues to outpace global demand.
USDA projects soybean prices to take at least until the 2020 crop year to recover. Under the expectation of China's continued import tariffs, soybean prices are expected to rise modestly -- up 20 cents to $8.80 -- as the market begins a multiyear process of working down large stocks, Johansson explained. Corn prices are projected to be up 5 cents to $3.65/bu.
This is projected to offer some feed cost relief to livestock producers. Low and stable feed costs over the past few years, and projected going forward, should create the environment for another record year for total meat and dairy production.
Johansson stated, “Fed steer prices are forecasted to settle at $118.50/cwt., up about 1.2% year over year, supported by solid demand. Hog prices are expected to decline to $42.50/cwt., down 7.5% from last year under the weight of large numbers of hogs, with the decline tempered by demand from expanding slaughter capacity.
“Prices for broilers have recovered in 2018 but are expected to settle at $97/cwt. as production expands modestly in 2019. Turkey prices are expected to rebound by 7%, but this comes as the industry adjusts to current market conditions following the poor prices and weak demand of late-2017 and 2018,” he said.
Milk prices are expected to improve in 2019 with a modest production expansion and better demand. The all-milk price is expected to rise 6.5% this year to more than $17/cwt. Cheese prices indicate some decline as large domestic stocks weigh on prices, while butter shows modest gains on strong domestic demand. “More export-oriented products, like nonfat dry milk and whey, are expected to show price strength on improved prices in the global market. With modestly higher feed prices and improved milk prices, margins are expected to improve modestly in 2019,” Johansson added.