Ag outlook remains subdued

Oversupply of agricultural products and unknown trade outlook keeps lid on agricultural economy.

The outlook for agriculture remains downbeat but is beginning to show signs of stabilization, according to the latest agricultural outlook released by the Federal Reserve Bank of Kansas City, Mo.

Economist Courtney Cowley, writing in the bank’s latest "Ag Outlook" newsletter, stated, “Although farm income was expected to stabilize, growing inventories and trade uncertainty remain key risks to the outlook.”

Although farm income appears to have stabilized in the short to longer term, one risk to the outlook has been growing supplies. Yields for corn and soybeans have been above 20-year trend levels since 2014 and have contributed to increasing inventories.

“Growth in U.S. corn and soybean inventories is a risk to the outlook because larger inventories have been linked to lower prices,” the latest report notes.

International demand has provided some opportunities for the agriculture sector, but uncertainty surrounding trade remains a risk to the outlook. USDA recently reported that exports are responsible for 20% of farm income.

“One reason trade is a risk to the outlook is because exports in recent years have contributed a larger share of the total value of U.S. crop production,” the report notes. “The total value of crop production has declined since 2013. At the same time, the total value of crop exports has increased slightly.”

Meanwhile, the U.S. share of world crop exports has fallen steadily over time, Cowley explained. In the late-1970s, the U.S. held a 65% share of world crop exports, and in 2017, the U.S. share is expected to be just 28%.

“The decline in the U.S. share of world crop exports suggests that the rest of the world has become more active in global export markets when the U.S. has become increasingly reliant on world trade,” she said.

One mitigating factor of increasing global competition has been trade deals, such as the North American Free Trade Agreement (NAFTA). Because the U.S. has become more reliant on international demand for agricultural products and international competition for agricultural exports has increased, uncertainty surrounding NAFTA and other trade deals is a key risk to the agricultural outlook, Cowley added.

Cattle sector woes

Beyond risks related to crops and trade, recent developments in the cattle sector also present risks to the outlook, Cowley explained. The cattle sector is a key industry to the Fed's 10th District agricultural economy, contributing more than 50% of the district’s total agricultural revenues.

“In the first half of 2017, strength in the livestock sector supported U.S. farm income, but increasing cattle inventories and greater price variability suggest that the outlook could remain weak,” the report notes.

Cattle profit margins have supported aggregate measures of farm income and are expected to be positive in 2017, following negative profit margins in 2015 and 2016. Higher prices and positive profit margins have occurred alongside increasing inventories.

“However, the pace of inventory expansion has slowed; cattle slaughter weights have come down slightly, and demand for beef has picked up both domestically and internationally,” Cowley wrote. “Despite higher (annual average) profit margins in 2017, risks to the cattle outlook still persist.”

Larger inventories have begun to weigh on prices in the second half of 2017. “Although average profit margins are positive for the year, monthly-average profit margins have been negative to just over breakeven since August,” she explained.

In addition to lower prices and negative profit margins in the second half of 2017, one concern for ranchers has been the increasing variability of cattle prices. Since 2014, cattle prices have become much more variable. From January to November, the average monthly variance and the range of prices paid increased significantly from previous levels.

In 2014, the larger range was due to a steady increase in prices from January to November. However, during the last three years, increasing price variability in a period of lower prices has contributed to added concern and uncertainty in the outlook for cattle producers, the report explains.

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