Farm income in the United States will continue to be challenged by a confluence of global economic factors - mounting supplies of grain and oilseeds, the U.S. dollar's continued strength and slowing growth in China - through the remainder of 2015 and into 2016, according to the new Quarterly Rural Economic Review from CoBank.
Net cash farm income will probably continue to decline over the next year or two, though to a lesser extent than the 25 to 30% drop posted in 2014-15. U.S. interest rates will be rising during the next year or two, as the Fed moves to normalize short-term rates. As a result, farmland values will recede, but it should be an orderly, measured decline, with cropland values bottoming out 10 to 15% on average below the cyclical high.
With inventories growing, crop prices should stay near their current levels well into 2016, according to the report. At the same time, those weak crop prices will continue to aid ethanol producers as well as the animal protein and dairy sectors. All three of these industries have suffered their own declining prices of late.
The animal protein industries are at different stages of what promises to be an aggressive expansion of meat supplies, while dairy producers also are intent on bolstering output, the report noted.
Animal protein - beef, pork and poultry - supplies are all on the rise after several years of challenges brought on by drought, higher feed grain prices and disease. In fact, the animal protein complex is now growing per capita meat supplies at the fastest rate in nearly 40 years. The larger supplies will likely cause meat prices to erode over the next two years, but should also improve capacity utilization for some links in the supply chain.
“Low feed costs will continue to benefit both animal protein and dairy sectors, but the dairy industry will face heightened risk in 2016 due to its growing export dependency and sharp increases in global and domestic milk supplies,” the report stated.
"In the face of mounting supplies and downward pressure on prices, U.S. agricultural exports now occupy center stage across the board - for grains and oilseeds, ethanol, animal protein, and dairy," said Leonard Sahling, manager of CoBank's Knowledge Exchange Division, which produced the report.
CoBank said it is doubtful that the U.S. dairy industry can stage a recovery without support from exports and is “pessimistic about the medium-term outlook for U.S. exports.” U.S. exports have been hampered due to a depreciating U.S. dollar, EU dairy quotas being lifted and Russia’s ban on EU dairy imports have redirected those products into Japan, Korea, Saudi Arabia, Egypt and Mexico. China importers of dairy products also seem to be on the sidelines. Market fundamentals are not expected to improve until early 2017.
"The new pricing paradigm will accelerate the pace and scope of supply chain realignments, throughout the entire U.S. agricultural sector. Moreover, we're beginning to see an increased need for access to debt capital as margins narrow further and savings begin to dry up."
China’s economic slowdown to 6 to 7% a year will trigger slower growth rates in those emerging countries with significant linkages to China, particularly with respect to raw materials and commodities.
The U.S. will be the major driver of global growth but will need to transition through Presidential and Congressional elections before beginning to address significant structured challenges, the report said. Consumer spending, housing and equipment purchases will likely be the main engines of growth. However, continuing uncertainty over key policies such as taxes, regulation, and immigration will continue to curb business fixed investment and to limit growth rates to the 2.5 to 3% range in 2016.