After five years of losses and tight profit margins, farmers are likely to see an improvement in 2020. That’s what several Iowa ag lenders are telling Wallaces Farmer as the farm economy moves toward spring.

“We are guardedly optimistic looking forward,” says Jim Knuth, senior vice president of Farm Credit Services of America, based at Perry in central Iowa. “We believe there’s opportunity in 2020, while also realizing there’s still volatility and uncertainty.”

Operating in Iowa, Nebraska, South Dakota and Wyoming, FCSAmerica is the largest ag lender in the upper Midwest.

One reason Knuth believes 2020 will be a better year financially for farmers is the recent progress on trade agreements. The U.S. signed a Phase 1 agreement with China in mid-January, and the U.S.-Mexico-Canada Agreement was passed by Congress and signed into law.

“In 2019 the U.S. didn’t make much progress on these trade deals; it was a lot of talk and speculation,” Knuth says. “Now we have them signed and need to see the actual purchases take place, especially with China. These agreements should help drive increased demand for our ag products.”

Market Facilitation Program

Further helping boost income, USDA will likely provide a third Market Facilitation Program payment to farmers this winter from the 2019 program. There is also a “decent chance” USDA will announce a separate 2020 MFP payment later, but it will likely be the last.

This is an election year, and it would be politically popular, as both sides of the aisle support farmers and agriculture. Whether this new MFP payment is introduced will depend on crop prices over the next several months as the market digests the recent China and USMCA trade deals. Knuth cautions farmers to avoid getting too dependent on MFP payments. “They can end just as quickly as they get started,” he says.

Improved stocks-to-use ratios for corn and soybeans are likely in 2020. “This is a good indicator of supply and demand,” he says. “Today, the ratios are better than anticipated just a few months ago. The corn ratio was expected to be above 15%, which indicates a soft market for corn. It’s now below that level. The soybean ratio remains historically high but is also trending down, to just over 10%, which is at the high end of the 6% to 10% range that’s traditionally been considered normal.”

Continued low interest rates

Interest rates will likely remain low in 2020, another area of optimism for borrowers. The Federal Reserve Board sets interest rates and tends to remain neutral in election years. “We think interest rates will again be a positive sign for agriculture in 2020,” Knuth says.

Stability in land values is expected to continue. Knuth cites sales and appraisal data from Iowa and the other states where FCSAmerica makes loans to farmers. Prices for high-quality cropland have been relatively stable the past five years. If U.S. net farm income starts to improve, he expects little upward pressure on land prices the next few years, as farmers will need money to rebuild working capital.

Looking at the data on farmland sales, Knuth says farmers buying land are still the main factor driving the land market, as the number of sales in Iowa have stabilized. While land values have crept downward overall, he says, “Land values have been a gift during this financial downtrend in the farm cycle that has occurred over the past five years compared to the land price collapse in the 1980s. Frankly, stability in land values over the past several years is probably the best we could have hoped for.”

Hope for better weather

“We are guardedly optimistic that our weather will be better for planting, growing and harvesting crops this year,” Knuth says. “‘It can’t be worse than in 2019,’ you may say. Theoretically, it could. But we remain hopeful for favorable weather.”

Another sign of better times is more farmers are doing a better job of treating their farming operation as a business. An early analysis of FCSAmerica’s borrowers’ records shows they had better performance in 2019 than 2018.

In 2018, he says 71% of FCSAmerica’s borrowers in the four-state area were profitable. About 66% of the farmers cash-flowed their operation and loan payments, and 77% had positive working capital. Looking at just the grain farming operations, the numbers in those three categories were comparable.

Knuth anticipates those numbers will be stronger for 2019, once the 2019 results are fully analysed, and potentially 80% of FCSAmerica’s farmer-borrowers will end up profitable for the year. “When we see 80% or more of our producers with a net profit in 2019, that means they are making decisions and adjusting to these difficult times,” he adds.

Staying profitable

In the economic cycle of farming, the pain of the current downtrend isn’t just affecting small producers. “There are farming businesses of all sizes that are succeeding, and operations of all sizes that are struggling,” Knuth says. Looking at what makes farms successful he notes that, “The biggest single factor in determining profitability is whether the farmer manages the operation as a business.”

Successful operators review and analyze their records on a regular basis, often monthly or quarterly. They allow those numbers to drive their business decisions. They also develop and prioritize marketing plans. “Putting time into marketing isn’t the last thing they do,” he says. “They make it a priority. They’re proactive; they pull the trigger. They preharvest market; they’re getting professional help.”

These producers are more willing to seek professional advice — agronomic, financial and marketing. They are also becoming better at negotiating rent, input costs and sales, he says. They are rethinking how they use machinery and equipment. Buying a piece of equipment might not be the best option. Instead, their view is, “I make money by using machinery and equipment.”

A business-oriented farmer is also more willing to recognize poor business arrangements and walk away from them if necessary. Knuth says selling assets, such as equipment or land, may be one of the best decisions you can make for long-term viability of your operation.

Farmers should consider big yields as a blessing, not a given, he adds. “A business plan needs to work with trendline yields. Crop production is complicated and capital-intensive. It’s a risky business with many things we cannot control: weather, pests, diseases, trade disputes, etc. It’s hard to go it alone. The trusted business adviser team you form — accounting, ag lender, crop insurance, agronomist, marketing experts — is very important.”