Commodity prices are sensitive to any number of factors, but a relatively uncommon one came marching onto the scene this summer — trade wars and tariffs.
China and the U.S. have traded several blows over the past two months, with each country racking up tariffs on billions in goods aimed at the other.
Soybeans, in particular, sit on the front lines of these tariff tiffs, as futures prices eroded nearly 16% between Memorial Day and late July, and futures prices hit new lows near the end of August. Corn and wheat prices also drifted lower earlier this summer.
USDA attempted to quantify the initial economic impact on these tariffs by dropping soybean export estimates for 2018-19 by 250 million bushels to 2.04 billion, and the agency also lowered its forecast for average prices by 75 cents per bushel, which translates to about $325 million in lost revenues.
But those are merely the short-term impacts. If commodity prices stay relatively lower moving into the fall, will that slide have longer-term impacts on cash rent and farmland values?
Prolonged suppression of commodity prices can indeed drag down cash rents and farmland values over time, notes David Widmar, co-founder of Agricultural Economic Insights. He sees farmers and analysts sorting themselves into two camps for now.
The first camp is optimistic that any trade scuffles will be resolved sooner rather than later. Some note that USDA Secretary Sonny Perdue has already announced $12 billion in additional aid to protect farmers against lower prices as evidence the U.S.-China trade situation will be resolved in the near term.
Also, China tends to buy soybeans from Brazil in the spring and summer, switching to U.S. purchases in the fall and winter. Because of that, the tug-of-war between the needs of Chinese soybean buyers and U.S. sellers has not truly begun in earnest.
The second camp is much less optimistic and is worried that these trade issues will stretch into 2019 or beyond.
Which camp is right? It may not matter, if farmers take a two-step approach to prepare themselves for either scenario. “For step one, I would encourage producers to update their budgets and their cost of production for this year,” Widmar says. “Don’t wait until November or December to see where you stand financially.”
For step two, Widmar encourages farmers to start making crop budgets for 2019.
“Think about what might be coming down the road,” he says. “Think about the key questions that will affect your business, and what the probability is of those things happening.”
A new normal?
Commodity prices are always on the move, notes Tim Koch, chief credit officer for FCSAmerica, and farmers are all too aware that price shifts can dramatically affect cash rents and farmland values. He points to the major downward price shift that has occurred since summer 2013 as a prime example. As commodity prices cooled over the past five years, so did farmland values — adjusting by as much as 18% downward in some key production states such as Iowa and Nebraska.
But Koch doesn’t anticipate farmland markets overreacting to current trade worries for now. If a “new normal” emerges for $3 to $3.50 corn and $8 to $8.50 soybeans, that would certainly apply further downward pressure on land values, but it may also take a spike in interest rates and a flurry of fall sales to further suppress land values, he says.
“It’s too early right now to draw any long-term conclusions,” he says.
In fact, cash rent rates and farmland prices only represent a fraction of the factors farmers need to stay cost-competitive this year, Koch argues. Farmers may want to review income diversification opportunities (including off-farm income), equipment adjustments, other input expenses or even living expenses as other means to improve their operation’s competitiveness.
Geography, availability and overall “farm fit” must also be considered when investigating whether to add, drop or retain rented fields, Koch adds.
“It’s really an individualized decision,” he says. “We don’t necessarily call out cash rents, but it certainly is one important variable to the cost equation. You may even want to look at rent as part of your overall cost structure and not as an individual expense.”
Local supply and demand remains arguably the largest single influencer of farmland prices, argues Randy Dickhut, vice president of real estate operations with Farmers National Co. A “relatively short supply” of farmland sales right now serves as a price stabilizer, he says, although an influx of farmland sales this fall and winter could help facilitate a drop.
“If the listing volume jumps at or after harvest, that’s when we’ll really be able to tell what the longer-term thinking is,” he says.
If profits continue to get squeezed by lower commodity prices, it’s reasonable to expect a few more “financially encouraged” sales moving forward. Even so, Dickhut says these types of sales could easily be absorbed by the market unless there is a large influx of them.
“In the end, we’re not expecting anything dramatic, but we do need to see how the economics play out,” he says. “As always, it helps to place pragmatism over emotion.”
Can you ride out the storm?
Cash rents and farmland values can be influenced by a number of factors, including commodity price anxiety incited by poor U.S.-China trade relations.
But what about the land that doesn’t change hands?
It’s a loss “on paper,” but more than a few landowners will be content to ride out the storm, according to Wendong Zhang, economist and Extension farm management specialist with Iowa State University.
For example, studies in Iowa indicate that 82% of the land in that state is fully paid for, Zhang says. And half of Iowa’s farmland has been owned for 20 years or longer, he adds.
“That means landowners here won’t necessarily be influenced to sell when commodity prices drop,” he says.
So-called “income shock” from lower commodity prices could still shake loose some additional farmland or cash rent availability, but bargain buyers might not find many deals in the short term, Zhang says.
“More people want to rent than there is land available right now,” he says, “and people tend to not want to lose out on those limited opportunities.”