Strong U.S. economy not helping struggling farmers
Despite tough market conditions, farm sector has remained relatively well insulated from potential solvency impacts.
The growth in U.S. real gross domestic product (GDP) has averaged 2.4% per quarter since 2013. Yet, down on the farm, conditions have been far from robust, agricultural economists noted.
In a new paper, "A Tale of Two Economies: Farmers Struggle Despite Strong U.S. Economy," Nathan Kauffman, vice president and regional branch executive at the Federal Reserve Bank of Kansas City, Mo., and Suzanne Jenkins, senior policy analyst at the Federal Reserve Bank of St. Louis, Mo., detailed the headwinds farmers are up against today.
“The farm economy does not always run counter to the rest of the overall economy, but unique conditions this past year — amplified in the Midwest — continue to curb agricultural growth,” they wrote.
Kauffman and Jenkins said in 2012, commodity prices began to soar as a severe drought lingered in the main growing areas of the Midwest, leading to a jump in land values and farm income. Following a peak in 2013, crop prices dropped as plantings increased and were coupled with good growing conditions and higher crop yields.
Dropping commodity prices have caused net farm income to plunge about 40% from the 2013 high and caused credit conditions to tighten.
Now, concerns are rising that farm income will fall even lower in 2018 amid trade disputes with China and other countries. About 80% of all U.S. commodities are consumed domestically, and 20% are exported.
This year’s soybean crop could see record levels, while the trade war with China has hampered demand for U.S. soybeans.
China imposed a 25% retaliatory tariff on U.S. soybeans, causing soybean prices to plunge close to a 10-year low this summer. China has long been the largest buyer of U.S. soybeans, purchasing close to 31% of U.S. production in 2017.
China has also increased its tariffs on U.S. pork products from 25% to 62%, the Fed report notes.
“While large harvests improve the cash flow of agricultural producers in the short term, they hurt profitability going forward because of the downward effect on prices,” Kauffman and Jenkins wrote. “In the second quarter of 2018, agricultural bankers across the Midwest reported elevated demand for farm loans, as well as a modest increase in problems with loan repayment, amid reduced agricultural profitability.”
This summer, the Trump Administration announced a trade mitigation package to assist farmers, with $3.6 billion of the $4.7 billion in the first round of payments going to soybean growers. A second round may come in January if the U.S. Department of Agriculture says it is warranted.
“While it is still too early to gauge the full extent of the potential impact of bumper crops and the tariffs on U.S. farmers’ balance sheets, the outlook for 2018 shows a further decline in net farm income to $65.7 billion, according to the latest USDA 'Farm Income Forecast' released on Aug. 30,” they added.
Farmland values appear to have remained relatively steady during the recent volatility, Kauffman and Jenkins wrote. Farmland values can comprise more than 80% of the total value of farm assets, so the debt-to-asset ratio -- a common measure of solvency -- is an important number.
“The farm sector appears to remain relatively well insulated from potential solvency impacts because the debt-to-asset ratio remains relatively low by historical standards,” they concluded.