A tale of two stories seemed to be the overwhelming theme at the 2018 Rural Economic Outlook Conference at Stillwater, Okla. Whether it was comparing the economy, nationally versus agriculturally, or growth in metropolitan areas versus rural, or even within production, crops versus livestock, the narrative is different.
Nationally, Dr. Nathan Kauffman, vice president and Omaha Branch executive, Federal Reserve Bank of Kansas City, reports that while momentum in the U.S. economy has persisted, the agricultural economy has remained in a prolonged downturn.
“The U.S. is in its 112th-consecutive month of an economic expansion — one of the longest, if not the longest, in modern history,” said Kauffman to a room full of bank executives, lenders, producers, economists and faculty. “The U.S. economy is in a relatively strong position. It's been gaining in momentum for over the last four or five years at a time when ag has been turning the other way.”
To understand where the agricultural economy stands today, Kauffman compared two time periods: 2007 through 2013 and 2013 through 2018.
The first period was characterized by strong commodity prices. “This was a period when farm income was rising dramatically. Nationally, farm income had increased almost 80 percent,” he said, pointing out prices for commodities such as wheat had risen 25 percent along with increases in the cattle market. “Pretty good conditions in agriculture.”
In contrast, the national economy was struggling. “We had the recession in 2007 through 2008 and into 2009, and the four years that followed were really pretty sluggish growth years, so we didn't have a lot of optimism in the national economy at a time when the ag economy was still doing very, very well.”
But since then, the economic environment has flipped. “Relative to 2013, farm income has been off by about 50 percent,” said Kauffman, while nationally the economy has been gaining momentum.
“The Fed has started to raise rates in recognition of the strength of the national economy. Obviously, ag is a part of the national economy, but when the Fed moves on rates it’s trying to take into account what it sees happening broadly and certainly not in any one industry in particular but recognizing that its actions are going to affect every industry within the economy.”
Another shift that began in 2012, and certainly in 2013, was the “dramatic deviation” from the pace of growth in the rural economy relative to the “metro” or metropolitan economy, said Kauffman, where job growth has outpaced growth in rural areas.
So what is driving this change in farm income? Kauffman primarily pointed to high input costs. “Even though we've seen commodity prices off by anywhere between 30 and 50 percent, depending on which commodity you're looking at, production expenses really have not come down all that much.”
Kauffman also noted that living expenses such as healthcare play a role as well.
As for the driver of change in commodity prices, Kauffman first focused on demand. “At the national level, ag exports are expected to be relatively strong. Despite the reductions that we've seen in China, exports have been pretty high. In fact, in 2018, at least before some of the retaliatory trade concerns, exports were expected to be the highest since 2014.”
Kauffman also pointed to biofuels as a demand driver. “Ethanol is a big driver of the demand for corn. But because corn competes with ground for soybeans which competes with ground for lots of other crops, you see biofuels being a significant driver of demand for agriculture in general. Even though we've gotten to a point where the growth has softened a little bit, it certainly has continued to rise and that's been a supporting factor for overall commodity prices and the ag prospects going forward.”
While Kauffman called the level of demand a “bright spot,” he says the challenge in agriculture is the reality that there is so much supply. “There’s been so much production across the agricultural sector that it's weighed on prices for a long period of time.”
For example, looking at growth in corn and soybean in terms of bushels per acre over the last five years, Kauffman said, “We've had what you could describe as above trend and even in some cases, well above trend yields in both corn and soybeans.”
He says what’s especially notable is production in 2016 and 2018. “In 2016, both in corn and soybeans, we’ve had dramatically higher yields than what would have been expected by trends — now, there’s going to be a lot of regional variation in that — and 2018, according to the September forecast from USDA, shows another similar year to 2016.
“So, sustained weakness in prices again, sort of looking at demand and recognizing that it's strong, but then comparing them with supply and knowing that supply has weighed on prices and in most commodity markets, the pressure on prices has weighed on cash flow in the ag sector for multiple consecutive years.”
An area that has remained strong in the farm ag economy is real estate values. The Omaha Branch collects data from bankers within its seven-state region, which provides them with more local farm real estate values. Leading up to 2013, Kauffman said, they saw dramatic growth in real estate values and since then, some softening in the market value.
“If you're a lender you're looking at a loan application for a borrower and you're trying to get a sense of the health of the balance sheet of that particular farm operation, what you're looking at is the asset base, trying to get a sense of, to what extent is this farmer in a position to be able to repay the loans? You say, well, the cash flow doesn't look very good. It didn't look good last year. It doesn't look good this year. It maybe doesn't even look good next year.
“You have some options though as a lender to be able to restructure that debt using farmland as a collateral.”
Kauffman recognized that while there are some challenges, real estate values are a bright spot.
Another area in agriculture where there’s been some optimism is within the livestock industry.
“One of the reasons that you've seen, in a relative sense, more optimism in cattle or hogs or even in poultry, is simply a recognition that the global economy has been doing pretty well and if the global economy's doing well, there’s typically strong demand for meat products and we've seen that in a global sense.”