A deal ending the tariff war between the U.S. and China won’t automatically return profitability to U.S. farming operations, but the failure to reach an agreement could spell serious trouble for U.S. agriculture down the road.
That may sound contradictory, but Richard Brock, president of Brock Associates, said that’s the kind of world farmers live in when he spoke at the Saturday Ag Update Meeting for the recent Mid-South Farm and Gin Show in Memphis, Tenn.
It’s been a difficult nine months for many segments of agriculture — including commodity advisory services and brokerage firms like Brock Associates — since President Trump announced he was placing tariffs on imports of Chinese goods into the United States and China, in turn, imposed tariffs on U.S. commodity exports.
“We’re in this phase where a lot of people are in a world of hurt,” Brock said. “You know there’s not a commodity in agriculture I can think of that’s profitable. Nothing. And it was like that back in 1984 and 1985.
Most observers have been reluctant to compare the current situation with the 1980s — until now. “But I’m hearing more and more people say this feels like the 1980s.”
Although the tariff war has been front and center in most analyses of the current downturn in agriculture, Brock says farmers and analysts need to look beyond the short-term impacts of a trade war.
“I know a lot of people want to blame the tariffs for what’s going on right now in the ag economy,” he said. “But this problem started in 2013. That’s where this comes from — it’s not from the tariffs.
So bullish in 2013
“It comes from the people who got so darn bullish in 2013 they thought this thing could never go down. They stored $8.50 corn at four bucks. They didn’t sell any of the new crop. I’ve never had five years in a row like we’ve had financially. We had three years in a row where our average selling price for corn was higher than the market ever traded. Those years 2013, 2014 and 2015, were the years to make a fortune. For those who didn’t the price is being paid right now.”
He said that in 2013, 2014 and 2015, the market was starting to crash. “We had a bunch of young whippersnappers out there — who never lived through the 1980s — who thought there was no way this market could ever go under $5 for corn and $10 for beans. They missed the bear market of 2013, and it was fast.
“If they missed that market, they had enough cash to get through 2013 and 2014 and maybe into 2015,” Brock noted. “Now what’s happening is those guys started running out of cash three or four years ago. They’ve had three years in a row now where those people have not cash flowed. The bank examiners are coming in and saying any account you have that hasn’t cash flowed in three years we’re classifying as a nonperforming loan.”
In general, bankers then have few choices: “They can put more money into the bank — if this is a privately-owned bank or if it’s in the Farm Credit System you have to bring your equity level up — because we’re assuming that loan is going to be written off. That’s what the bank examiner is saying.”
The lender then tells the borrower he has three choices: A. he can find a new occupation; B, he can find a new lender; or “C, he can sell off some assets to try to get everything to work. That’s where we are right now. And it’s basically because of people who missed the bear market in 2013, in my opinion.”
The ag community can blame the tariffs, he said, “but for the person who did a good job in 2013 and 2014 the tariffs wouldn’t have been as much of a problem. Nevertheless, there’s nothing we can grow today that makes money.”
USDA statistics show that land values have continued to hold their value and even appreciate slightly. But those statistics can be somewhat misleading.
Softening land markets
“We’re seeing softening in the land markets,” said Brock, who cited the sale of a 90-acre tract of land not far from where he grew up in central Indiana. The land changed hands for about $6,000 an acre last November.
“This is farmland that three years ago I would have had to pay $9,000 to $9,500 an acre for,” he noted. “It’s another situation where the lender said: ‘If you want to farm next year, you’re going to have to get rid of something to get the balance sheet in order.’ We’re seeing pockets all over the country where the land market has gotten soft.”
Commodity advisers have had their share of economic problems because of the lack of price movement since last summer. “Since September, the corn, cotton and soybean markets have done what?” he asked. “Nothing. They’ve done nothing but go sideways. And, in this market, there’s nothing we can do for our clients. We went four months without making a recommendation.”
The tariff announcement in June contributed to the problem, he noted, “but the only fact we really know about corn and soybeans is that we have too much of both. The carryover supplies are enormous.”
The other fact is the marketing year for both is half over, he said. “No matter what happens with the tariffs, it’s a virtual fact you cannot ship enough corn and beans between now and the end of the marketing year to change the balance sheet. And yet we’ve all been hanging on to the possibility that the magic is going to happen and run this thing through the roof.”
What will happen with the trade negotiations? “Your guess is as good as mine,” Brock noted. “I think we will get an agreement, but I think it will take longer than any of us want. I don’t think it is going to happen next week.”
The Chinese have more to lose than the U.S., he said. “They need us more than we need them. Their inventories are going up, and their economy has slowed substantially. They are not a democracy, and they need to keep their people fed and employed.”
On the other hand, if the trade negotiations “completely fall apart, that could take soybeans to $6 a bushel,” he said. “If beans go to $6, we have real problems. Then we’re going to have to go back to a period where we have government programs that idle farmland because if we can’t get this down on the export side, you have to cut production.”