The Outlook for U.S. Ag- USDA Chief Economist Robert Johansson

USDA Chief Economist Robert Johansson provided an outlook for U.S. agriculture today at the at the Department’s annual Agricultural Outlook Forum in northern Virginia.

In part, Dr. Johansson indicated that, “U.S. economic growth is expected to be near 3 percent in 2016 and 2017 before gradually moving to a longer term growth rate of 2.3 percent…[and]…the real value of the dollar increased substantially in 2015 relative to competitor and customer currencies and that growth is expected to continue through 2017.”

Does that mean a stronger U.S. economy and strong U.S. dollar adversely impacts the U.S. agricultural economy? Clearly, a stronger dollar means it is more difficult to sell products to countries with weaker currencies, such as Egypt and Nigeria (major wheat importers) and it is easier for countries, such as Canada and those in the EU, to sell their agricultural products abroad, making for an extremely competitive trade environment. However, a strong economy also helps U.S. producers in several ways. First, it is easier for U.S. buyers to import goods, such as fertilizer, from countries with weakening currencies, such as Canada, Russia, and Ukraine.

“Second, a stronger U.S. economy provides improved off-farm income opportunities for a large majority of U.S. farm households. Since the latest recession ended in 2009, median farm household income has grown faster than U.S. median household income (see figure 9). Between 2010 and 2016, median farm household incomes are forecast to have increased by more than 50 percent. Most of that growth has come from improved off- farm income opportunities. Off-farm income and on-farm income for median farm households are all projected up in 2016. That is true for both smaller residential farm households as well as larger commercial farm households.”

More specifically on trade, Dr. Johansson pointed out that, “Overall, U.S. agricultural exports are forecast at $125.0 billion for FY2016. That is down 10.5 percent from last year, with one-third of the decline coming from reduced sales to China.” And with respect to Brazil, on the export side, he noted that, “Relative to our projection last year, we now estimate that Brazilian exports of corn and soybeans will be higher by about 10 percent for each year over the forecast period.”

And on the issue of production and prices of the major U.S. commodities, Dr. Johansson stated that, “Production has outpaced consumption for many grains and oilseeds over the last three years. Relatively high prices for much of the last decade have resulted in increased production both in the United States and around the world. We have had record or near record world crops for corn, soybeans and wheat over the last three years (see figure 20).”

And correspondingly on prices, he added that, “U.S. prices for most agricultural commodities have fallen with the increase in stock levels, as anticipated, but remain above levels seen in the period 2000-2003 (see figure 23). Further price reductions are expected for the 2016/17 marketing year for corn, soybeans, wheat, and cotton. Wheat prices are estimated at $4.20 per bushel, a decline of 16 percent from the current year. The strengthening dollar and increased competition have sharply reduced prospects for wheat exports and prices. We have already seen winter wheat area come in below trade expectations suggesting producers are already adjusting their plantings. Corn prices are projected to fall to $3.45 per bushel for the 2016/17 marketing year. Soybeans prices are forecast at $8.50 per bushel. The all-rice price is forecast flat year-over-year at $12.90 per hundredweight. Cotton prices are projected at 58 cents per pound.”

The presentation also pointed out that, “Overall corn and soybean acreage is expected to total 172.5 million acres, up 1.8 million acres from 2015. Corn area is expected to increase by 2 million acres to 90.0 million in 2016 with lower fuel and fertilizer making corn more attractive relative to other crops. With higher production and larger beginning stocks, corn supplies are projected to be record high…Lower-priced forward marketing opportunities and changes in input prices, which favor corn over soybeans, are projected to reduce soybean planted area in 2016 by 200,000 acres to 82.5 million.”

(Note: For a closer look at corn and soybean acreage trade-offs, click here).

In the livestock sector, Dr. Johansonn noted that, “Turning to the livestock, dairy and poultry sectors, we project that total meat and poultry production will be at a record high of 97 billion pounds in 2016, as production of beef, pork, broiler, and turkey all increase.”

Addressing the overall financial health of the agricultural sector, Dr. Johansonn explained that, “Overall, the financial health of the agricultural sector is strong even as the pattern of lower crop and livestock prices continues. ERS projects that net cash income and net farm income are both expected to fall slightly compared to 2015, but by much less than last year. Net cash income is expected to fall by 2.5 percent, or about $2.3 billion, and net farm income by 3 percent, or about $1.6 billion. Last year net cash income fell by 27 percent and net farm income by 40 percent.

“However, high net farm income levels from several years ago helped U.S. producers strengthen their financial base and that is still reflected in the financial outlook. Heading into spring planting this year, USDA projects a slightly higher debt (mostly from operating loans) and lower assets (from some erosion in land values), resulting in a slight increase in the debt-to-asset level in 2016. While such an increase indicates rising financial pressures, those ratios remain near historic lows.”

At the farm level, the presentation pointed out that, “What is clear from the farm income forecast is that farm budgets have been tightening with lower prices. For example, this crop budget calculator from the University of Illinois uses costs from last year, but has been updated to show expected prices for corn and soybeans in 2016 (see figure 35). Revenue to cover such things as rent and salary after accounting for other costs is lower than the average cash rent value in Illinois from 2015, and much lower than the cash rent value of highly productive farmland. This illustrates some places where producers could seek to tighten budgets: chemical inputs, seed purchases, crop insurance, machinery costs, etc. In addition, government payments could contribute to net revenues; a county-level Agricultural Risk Coverage (ARC-CO) payment of $30 per acre is assumed in the calculator, but that could be higher or lower depending on the benchmark revenues for that county.”

Lastly, on the issue of farmland values, Dr. Johannson stated that, “Recent data show [click here, here, and here for more detail] that land values might have hit a plateau; fourth quarter 2015 data show flat ranchland value. And in general, farmland land values in the region have been weakening lately.

“Is land still valued too highly, and if so, by how much? One way to think about this is to compare land value and the income stream from cash rent. This comparison shows that the land values could make sense in some regions. For example, in the Corn Belt, with projected 2016 cash rent and the current low-risk interest rate, the revenue stream is rising (see figure 39). The income stream is not as strong if we assume that interest rates rise in 2016 to the levels of a couple years ago or if cash rents fall, but in either case, present value of the income stream remains above the average land value in the Corn Belt. So, given forecast cash rent and current interest rates, the income stream could support the current land value in the Corn Belt. Of course from our earlier slide we know there will be pressure to renegotiate those cash rents lower, but this comparison lends some weight to the notion that such adjustments will likely be slow.”

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