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Ag sector starts on stronger financial footing in 2021

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Pace of China export growth important for measuring the strength in ag commodity markets going forward.

The ag economy entered this year with one of its strongest financial outlooks it's had in years. At the start of 2020, the expectation was a 15% decline in working capital in the ag sector, but now things are looking more profitable although uncertainty remains, explains Nate Kauffman, vice president and Omaha branch executive with the Federal Reserve Bank of Kansas City.

“It does appear that ag producers are entering 2021 in a relatively strong financial position, and this is a very recent change going back to the past few months,” says Kauffman.

While speaking at the USDA Agricultural Outlook Forum, he notes as of January 2021, the ag market has seen sharp increases in corn, soybean and wheat prices relative to a year ago. In addition, higher prices in the case of hogs and even in milk, however, some challenges remain in cattle. Kauffman says exports to China did pick up significantly in 2020, and the pace of this growth will be important for measuring the persistence of strength in ag commodity markets going forward.

Some industries are better positioned, while there are some challenges in the livestock sector. “Cattle prices are relatively subdued compared with a year ago, and recognizing that not all industries will be in the same position even though we've seen a significant increase in prices in some markets that have supported the stronger credit conditions more recently,” Kauffman says.

Back in April of 2020, there was an expectation with sharp declines in commodity prices, significant concerns about the pandemic, that the ag sector would see a decline in land values. That turned out to not be the case and more of our contacts describing an environment where they think that farmland values will actually increase going forward, Kauffman says.

Uncertainty remains

Kauffman notes there are near-term risks, including anything associated with the pandemic. “Specifically, as it relates to macro-economic effects, population growth in other places and prospects for exports all part of that,” he warns. “Related to that will be prospects for household finances and off farm income, both important pieces to the general financial stability of the farm sector overall and the ability to make payments on loans.”

Going into 2021 there will be a question of the degree of support of government payment specifically recognizing the impact on farm income in recent years through Coronavirus Food Assistance Program and Market Facilitation Program payments.

“Regardless of the changes in commodity markets, the changes in policies, and things going on with the pandemic, at the end of the day producers are still needing to make decisions,” says Kauffman. “They're making decisions obviously on planting, having to make decisions about marketing, risk management, and when to make investments. All of those things are much more difficult to do when there is a heightened level of uncertainty.”

Disciplined approach

Kauffman suggests a disciplined approach to risk management and financial decisions is a prudent first step in managing the year ahead.

“I think that demonstrates to lenders that commitment to the kinds of things that they may be interested in. Making sales in agriculture can be an emotional decision, but taking a disciplined approach as to how to go about doing that, marketing, and making those kinds of decisions, I think, would be in the best interest of producers, regardless of what prices and other things might look like, that ultimately might be beyond their control,” Kauffman says.

Carrie Litkowski, USDA Economic Research Service economist, suggests farmers need to do what they've always done, “which is maximize their output and reduce their costs, to try to get through the year. And if they're struggling, look for the aid that might be available to them that could maybe help their bottom line.”

David Williams, a doctorate candidate at Purdue University, says his research finds that farm household spending is not dramatically changing from year to year. It’s not atypical for a farmer to make $80,000 one year and lose $30,000 the next.

In looking at the marginal propensity to consume, or MPC, Williams notes if farmers earn an extra $100,000 they tend to spend just 1-2% more. Rather than earning an extra dollar and turning around and spending an extra dollar, farmers are smart and know how to budget. In recent volatile years, farmers have been able to smooth out income fluctuations.

Williams explains farmers typically hold cash or stocks or bonds, or most likely invest in the farm enterprise and build equity. In a bad year, they tap into that either by taking out a new loan or pushing off the replacement of machinery and living off that depreciation, he says.

Kauffman says, “One of the other things we started to notice at the end of 2020 was an indication that a lot borrowers started to make plans to increase capital spending, purchases and investments going into 2021.”

Long-term outlook

While opening up the ag outlook, USDA Chief Economist Seth Meyer says the longer-run outlook reflects decades-long trends in income growth and shifting dietary patterns toward an increasingly diverse set of crop and animal products, especially in developing countries.

USDA’s recently published long-run projections envisions world demand for beef, pork, and poultry (combined) to increase by more than 17% through 2030, supporting an increase in world corn trade of 22.5% (41.8 million tons) and soybean trade of 26.7% (36.2 million tons), by the end of the 2030/31 crop year.

The U.S. is expected to capture a significant—but declining—share of this growth, with U.S. corn exports projected to grow 11.4 million tons to 70.5 million, and U.S. soybeans exports would increase from 59.2 million tons in 2021/22 to 64.6 million tons by 2030/31.

Global consumption of beef, pork, and poultry is projected to grow 8.9%, 17.3%, and 16.3%, respectively, between 2021 and 2030. China, accounts for the largest single share of increased consumption of all three meat commodities and a dominant 73-percent share of the projected increase in pork demand.

“Projected demand growth for all meats is fastest among middle income developing regions, including Southeast Asia, Latin America, Africa, and the Middle East. Consistent with its position as the cheapest of the meat commodities, growth in poultry consumption is the most broad-based, including significant gains in lower income developing countries,” says Meyer.

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