Welcome to 2016! This year, we will embark on an economic journey that will be quite different than the previous 15 years. The following are some perspectives and variables that will influence the economic fortunes of agriculture moving forward. From a 30,000-foot perspective, there are several potential economic impacts and stimuli to examine for 2016 and beyond as you plan for future sustainability.
First, China’s economy matters. While only 1% of the United States’ gross domestic product (GDP) economy is attributed to trade with China, the economic health of agriculture, manufacturing, energy and many other parts of rural America are significantly impacted by China. Currently, China serves as a pivotal economy to other emerging nations. For example, if China’s GDP growth rate should decline from the current level of 6.9%, to under 3.0%, the economic health of the U.S. flyover states would be extremely distressed. For planning, maintain a close eye on interest rates and currency devaluations in China, the world’s second largest economy.
Next, producers often ask when costs will decline. Well, in the classic cyclical reset, commodity prices always decline 9-24 months before expenses and costs. To begin, the economic reset started in the grain industry and now, extends into the livestock industry and other commodities. In the next two years, negotiations on cash rents along with other variable costs will be necessary. A reset in land rent prices must and will occur. In many cases, landowners may need to accept a 1-2% dividend in return, instead of 3-5%. Under current conditions, the normal rate of return we have come to expect on rented land is no longer sustainable. Marginal land will see discounts, possibly steep. Quality real estate will maintain its value. Additionally, producers will continue their evolution and implementation of new agronomic practices in order to gain cost advantages.
Not surprisingly, expect tighter credit in 2016. Instead of going to the lender and requesting credit as usual, be prepared with your financials and overall strategic plan. All lenders will encounter more rigorous scrutiny by regulators as farm sectors continue to face the economic reset. This places business planning as a foremost priority.
The impact of El Niño will intensify in 2016. As any producer already knows, weather can be a fierce and fast force on farm economics. Will the drought in California end? Will the Midwest region see dry weather? This is a great place to investigate new technologies to determine how your farming operation can benefit from better weather modeling, data and applications.
The year 2016 is a significant election year in the U.S. It could be interesting, ugly, and probably, both. The senatorial, congressional and state elections often have a larger impact for agriculture than the national election. Regardless, too few candidates at all levels have agriculture on their radar screen.
In addition, there is much talk of a possible domestic recession in 2016. In actuality, there is approximately 50% chance the U.S. will return to recessionary times. While some indicators point toward economic trouble, the outcome of various other factors will be required to determine the future economic health of our country. A threat of possible recession is critical to the livestock sector; particularly, beef, which in turn, will impact the grains sector as well.
One thing is certain: 2016 certainly will not be a boring year. While agriculture has experienced various economic resets before, circumstances today are different. As an interconnected industry, global as well as domestic factors such as, China or the U.S. election will bear direct impact on agriculture and future profits. As we move into this new territory for agriculture, build your financial case as well as your financial liquidity in order welcome opportunities that will come. For the outside factors, stay tuned!