Agricultural Outlook: Concerns Persist for Farmers and Ag Lenders in 2016

Background

Since the drought of 2012, which impacted large production areas of the Midwest, U.S corn and soybean production have been consistently robust. Corn production was record high in 2014, while 2013 and 2015 ranked second and third all time. The U.S. attained record soybean production in 2015, which broke the previous record, which was set just one year earlier. In 2013, farmers generated the fourth largest soybean harvest ever.

Large supplies have caused market prices for corn and soybeans to diminish over time. The erosion in the price of these crops could impact economic variables such as farm income, land values and capital expenditures in 2016.

Net farm income for U.S. producer set a record of $123.3 billion in 2013, but USDA has estimated 2015 net farm income at only $55.9 billion, which is a 38% decline from 2014 (“Iowa farmers brace for tough 2016,” Christopher Doering.  The Des Moines Register. 1.15.16).

Earlier this year, in its Beige Book report, the Federal Reserve indicated that for the Chicago District, “Most contacts expect that farmers will face tighter (and possibly negative) margins this year.” With respect to the Minneapolis District, the Fed noted that, “Crop prices remained low, and farm incomes for 2015 were expected to be at their lowest levels in 10 years.”  And the Kansas City District pointed out that, “Both crop and livestock prices remained below the cost of production for some producers, continuing to strain farm income and cash flow.”

In a separate Fed report in January, the Kansas City District also stated that, “As farm income declined again in 2015, persistently high short-term lending needs amplified concerns about farm sector liquidity moving into 2016, especially if farmers’ profit margins remain low.”

Despite the diminished outlook for the agricultural sector, many U.S. farm households supplement their annual income with “off farm income.” In fact, well over half of farm household income generally comes from “off of the farm.”

The U.S. macro economy grew at a feeble 0.7 percent in the fourth quarter of 2015, while concerns about Chinese economic growth and the potential impact of low oil prices have dampened financial markets in the New Year. Nonetheless, the economy grew 2.4% for all of last year; the same as 2014, and many economists expect growth in 2016 to continue, albeit at similarly less than stellar pace.

 

Implications

Headwinds from both on and off the farm will be a concern for agricultural producers and farm lenders in 2016, with potentially significant impacts on several variables.

Interest Rates– Global financial uncertainty has raised questions about the likelihood of the Federal Reserve raising its benchmark interest rates again after its December increase, which was the first time the Fed raised rates since the financial crisis. If interest rates remain at current low levels, producers could look into locking in these rates in financing instruments.

Land Values– The Federal Reserve Bank of Chicago noted in November that, “Farmland values for the Seventh Federal Reserve District were overall unchanged in the third quarter of 2015 from a year ago.” However, if farm profitability margins continue to be squeezed, this could put downward pressure on the price of farmland, and could also have important implications for producer / landlord cash rent agreements.

Loan Portfolios– Farm lenders should be proactive about risk assessment and loan performance. A recent DTN article pointed out that, “Regulators have imposed stricter rules in reaction to the 2008 financial crisis and [farm lenders] don’t have the same forbearance capacity that they had in decades past.”

The Federal Reserve Bank of Kansas City made this succinct observation in November: “Expectations of further slumps in District farm income have caused agricultural lenders to continue to stress the importance of maintaining adequate levels of working capital, especially for highly leveraged producers.”

Capital Purchases / Leasing– A separate DTN article from January stated that, “For the past two years bank executives surveyed by Creighton University’s Midwest Goss Report saw machinery sales eroding.” Leasing agreements may get a second look from some producers instead of purchases; legal consultation regarding the specifics of lease terms may also be a consideration.

 

Conclusion

As 2016 unfolds, farmers and lenders will be keeping a closer than normal watch on key economic variables; the agricultural outlook could have larger than normal implications for market participants. In addition, spring and summer weather will have an important impact on prices: Another year of robust production could continue to dampen the market outlook for many Midwestern farmers.

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