Down but not out

BY MATTHEW WILDE

Farmers are making less money, working capital is scarce and borrowing is up, according to the latest government statistics.

Economists expect the disturbing trends — bolstered by a reduction in U.S. soybean exports to China due to the ongoing trade war between the nations — to continue in 2019. But there’s hope for better days ahead.

“Despite the obstacles, I see opportunities,” says Arlan Suderman, chief commodities economist for INTL FCStone.

The challenges are sizable this year.

According to the U.S. Department of Agriculture (USDA) Economic Research Service:

• Net farm income, a broad measure of farm profitability, nationwide is projected at $65.7 billion. That’s 13 percent lower than 2017 and a nearly 50 percent drop in five years.

• Available working capital nationwide is down 68 percent since 2012 to about $50 million.

• Total farm debt is projected at a record $406.9 billion, up 3 percent from 2017.

• Farm debt-to-asset ratio, on average, is projected at 13.4 percent — the highest level since 2009 and the sixth consecutive increase.

• The farm debt-service ratio is projected to increase to 27.8 percent, the highest level in 30 years.

At the Agri-Pulse Ag Outlook Forum on Sept. 27 in Kansas City, Suderman rattled off three economic opportunities for farmers — expanding trade, corn supply and demand and African swine fever. All could eventually lift the sagging farm economy.

“I’m a glass-half-full kind of guy,” Suderman says.

Trade

Trade agreements this year with Mexico, Canada and South Korea will bolster U.S. ag sales, he says. Others are in the works with the United Kingdom, the European Union (EU) and the Philippines. But settling the trade dispute with China is key to rapidly improving the financial health of farmers.

China mostly targeted U.S. ag products with retaliatory tariffs in July after the U.S. placed duties on Chinese goods to stop unfair trade practices. A 25 percent additional tax on imported soybeans, which drastically reduced sales to China, tops the list. Prices have dropped more than $2 Brock Hansen per bushel as a result.

Chad Hart, Iowa State University Extension and Outreach grain economist, believes the two largest economies will eventually resolve their trade issues.

“At least right now, it looks like 2019 will be another year of struggles,” Hart says. “If you take Chinese soy purchases off the table, there’s a long list of market growth for soybeans. Mexico, the EU, Canada, Egypt, Iran and other countries are all buying more.

“When the Chinese trade dispute is settled, they will resume purchases. And, there’s a pathway to growth in other markets,” he adds. “It gives me longer-term optimism.”

Hart says a “good chunk” of farms are doing OK due to savvy marketing and business decisions. But liquidity is a concern.

“We have some farmers feeling the strain and stress,” Hart says. “Some will have to make extreme moves to stay in business.”

Corn

Corn prices haven’t suffered soybean’s fate.

Worldwide corn demand is out pacing production, unlike soybeans, for the 2018-19 marketing year. Corn supplies are dwindling despite several record crops.

The USDA pegs global corn ending stocks at 159 million metric tons (mmt) or nearly 6.3 billion bushels, down more than 37 mmt or more than 1.5 billion bushels from last year.

Suderman says that’s a 52-day supply.

“I see more of a chance of $4 corn than $3 corn,” Suderman says.

December 2019 corn on the Chicago Board of Trade was nearly $4 per bushel at the end of October.

The farm economy makes Brock Hansen nervous, but the Baxter farmer says profit potential exists next year. He was able to make money on a good portion of the 2018 soybean crop by selling before tariffs reduced prices and he’s already making 2019 corn sales.

ISA member and soybean farmer Brock Hansen

“If we continue to grow the bushels we have in the past, 2019 corn is profitable,” says Hansen, an Iowa Soybean Association member. “There’s an advantage having home storage if crops are properly marketed.”

Hansen’s 2018 corn crop was again a record-setter, averaging 270 bushels per acre at the top end and the 230s at the low end. Soybeans ranged from 55 to 80 bushels per acre.

“Lately, we’ve been able to bushel our way out of lower grain markets, but one of these years we won’t be so lucky,” Hansen says.

African swine fever

Suderman has no confidence China will be able to control African swine fever that threatens its pork industry. China's pig herd is estimated at a 700 million, according to recently published reports.

China has instituted strict transportation and other rules to curtail the spread of the deadly swine disease, which doesn’t affect humans. Reports indicate millions of hogs have been culled and possibly 25 percent of its entire herd may die or be destroyed.

Pork is the most popular meat in the communist country of nearly 1.4 billion people.

“There are great export opportunities there,” Suderman says. “Food inflation is the No. 1 driver of social unrest and China doesn’t want that.”

African swine fever is the biggest story in agriculture, according to Curt Hudnutt, executive vice president of rural banking for Rabobank North America.

If China’s hog herd is reduced by 5 percent, that equals total U.S. pork exports, he says. A 10 percent reduction equals total world exports.

The potential of increased U.S. pork exports are good for Iowa soybean farmers since pigs are their No.1 customer. Historically, about one-fourth of the state's beans are fed to hogs.

“There’s a tremendous opportunity for the animal protein complex,” Hudnutt told farmers and industry stakeholders at the Agri-Pulse forum. “We thought U.S. pork production and prices would be under tremendous pressure in 2019. That’s changed greatly.”

Contact Matthew Wilde at mwilde@iasoybeans.com.