It’s no secret that grain prices have been in a slump for the better part of this decade. And while the situation is dire for plenty of farm operations, it could be worse still, according to Nathan Kauffman, Vice President and Economist, with the Federal Reserve Bank of Kansas City.
“For the past five years or so, we’ve been wondering when things might get worse and why they aren’t worse already,” he told attendees of the 2019 Agricultural Bankers Conference in Dallas.
Kauffman walked through eight factors that he thinks has lessened the blow of low prices and mitigated financial stress.
1. The tremendous build-up of wealth from 2004 to 2013. Nearly a decade of really good years in agriculture has provided a buffer for the hard times that have followed, he said.
“Where there is concern now is working capital deterioration or equity burn,” he said.
2. Temporary or “one-off” factors. Kauffman cited several examples, starting with geopolitical concerns in Russia and Ukraine in 2014 that created some selling opportunities. In 2016 and 2018, production concerns in South America offered some assistance. And this year, governmental assistance through the Market Facilitation Program is a prime example.
“Each year there seems to have been something that offered support that wasn’t necessarily expected at the beginning of the year,” he said.
But by their very nature, farmers shouldn’t depend on one-off factors moving forward – they’re just too hard to predict.
3. The downturn is driven by supply, not demand. “What’s happened as a result is that supply tends to weigh on prices,” Kauffman said. Still, farmers should monitor any signs of softening demand.
4. The general economy is strong. With the lowest unemployment rates since the 1960s, this has opened opportunities to off-farm income, Kauffman said.
5. Low interest rates. “Interest expenses for producers is not their main concern, and it’s not even been in the top five for the past several years,” Kauffman said. “Lots of other things have been more important.”
Interest rates have dropped three times so far in 2019, with President Donald Trump applying plenty of pressure to the Federal Reserve to keep them low or move them even lower. There’s little reason to expect any substantial increases in the near future, Kauffman said.
6. Stable farmland prices. “We’re still not seeing fundamental and sharp declines to land values,” Kauffman said. “The reality is there’s still pretty strong demand for farmland. It’s perceived to be a long-term stable return.”
For farmers who own land, they could sell off a portion of it to help them push through another bad year, he added: “It’s an asset base you can use to protect against future losses.”
7. Repositioning. “Borrowers have found opportunities to adjust what needed to be adjusted,” Kauffman said.
That has manifested itself in any number of ways, from smarter marketing to finding operational efficiencies or cutting costs, he said.
“Farmers who have done those things are really good managers because they know how to run a business and they know how to take pressures coming from different places and adjust to them,” he said.
8. Lenders have also made adjustments.
None of these eight factors are set in stone, Kauffman concluded. Because of that, it’s important to ask a critical question – if any single factor shifts significantly, how does that affect the landscape moving forward?
“You’ll want to be in a position to think critically if something changes,” he said.