After five years of mostly lower farm income, telling farmers to be worried about the economy may seem like an afterthought. But rising anxiety on Wall Street isn’t caused merely by mad money getting a little bit crazier. One of the more reliable barometers of the economic cycle is flashing warning signs that trouble looms on the horizon for the U.S. and likely world economies. If history is a guide, that could make it harder for the agricultural sector to recover.
Net farm income fell in four of the last five years from record highs achieved in 2013. Profits are expected to be down again in 2018, though USDA’s latest estimate isn’t quite as bad as earlier projections thanks to the infusion of Market Facilitation Program payments awarded to offset the trauma from trade disputes. But my initial forecast for 2019 shows income steady at $66.2 billion, barely half the record set in 2013, and that’s before the cost of inflation is factored it.
USDA won’t release its first outlook for 2019 financials until February, and much could change by the time the ledgers are closed a year from now. But even if the farm sector starts to improve, it could run into headwinds from an overall economy headed in the other direction. Two lessons from history are cautionary tales.
First, the ag economy doesn’t move independently of what happens elsewhere. Since 1929, every year Gross Domestic Product fell also saw net farm income decline, except one. Second: Every recession since 1955 was preceded by inversion of the yield curve, when short-term interest rates moved above long-term rates.
The yield curve used to be a standard part of my presentation on the ag economy as the U.S. began to heal from the “Great Recession” of 2007-2009. But it dropped from my slide deck the past few years. Now it’s back and sending shock waves through already rattled financial markets.
While gyrations on Wall Street can be hard to swallow for investors, the yield curve isn’t predicting a recession next week. The curve isn’t completely inverted yet, though rates on 3- and 5-year Treasuries did move above the 7-year yield last week. But the curve is tighter compared to two years ago, reaching its narrowest level since the early days of the last recession.
Moreover, even if the curve inverts, it doesn’t mean recession is nigh. Sometimes an inversion isn’t followed by a recession. And some past inversions occurred more than a year or even two before the actual official start of the recession.
Trouble is, recessions are only declared after the event. So that’s why investors are paying so much attention, especially with the Federal Reserve likely to raise rates another quarter of 1% at the end of its next two-day meeting Dec. 19, taking the prime rate to 5.5%. But odds are shifting for the Fed to hit the pause button after that. Betting on Federal Funds futures currently shows around a 50-50 chance the central bank won’t rates at all in 2019.
Stable rates would be good news for growers on a couple fronts. All things being equal, higher rates tend to strengthen the value of the dollar, which can be bearish for commodities. And debt levels are likely to keep rising as more producers burn through working capital and tap equity to finance operating expenses. Flat rates would at least control that cost a little, though the cure may be worse than the disease: another year of low net farm income sooner or later if history repeats.
Senior Editor Bryce Knorr joined Farm Futures Magazine in 1987. In addition to analyzing and writing about the commodity markets, he is a former futures introducing broker and is a registered Commodity Trading Advisor. He conducts Farm Futures exclusive surveys on acreage, production and management issues and is one of the analysts regularly contracted by business wire services before major USDA crop reports. Besides the Morning Call on www.FarmFutures.com he writes weekly reviews for corn, soybeans, and wheat that include selling price targets, charts and seasonal trends. His other weekly reviews on basis, energy, fertilizer and financial markets and feature price forecasts for key crop inputs. A journalist with 38 years of experience, he received the Master Writers Award from the American Agricultural Editors Association.
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