By Brent Gloy and David Widmar
Welcome to 2018! It’s kind of hard to believe, but we’ve been writing this column for over three years. It seems each year is interesting, surprising, disappointing, and exciting in its own way. We’re sure that 2018 will be no different. Let’s jump into what we see as some of the biggest issues for 2018.
The macro economy
The story for the U.S. economy in 2017 was generally good with economic growth, low unemployment, low inflation, the continuation of low-interest rates, and record-highs in the stock market. Will these trends continue in 2018?
The Federal Reserve started to increase short-term interest rates and has signaled that it plans to continue doing so in 2018. Increased short-term rates seem like a relatively safe bet. As for economic growth, things seem to be improving. While reactions are mixed on the tax bill it is hard to argue that it will be a drag on growth in 2018, so that seems positive as well. Unemployment remains low by historical standards and inflation remains subdued.
Going forward one will want to keep a close eye on how the economy evolves. With all this good news, one has to wonder if 2018 will be the year slightly higher inflation kicks in. Oh, and let’s not forget about the global economy. The IMF indicates that global economic growth seems to be picking up and even noted improved conditions in the Euro area and Japan, places that had been lagging for some time.
Overall, the general economic outlook seems like good news for agriculture. One potential area to watch is the behavior of both short and long-term interest rates. If long-term rates start to creep upward it would provide some headwinds for the farmland market. That’s not to say there aren’t problems around the globe, let’s all be thankful we aren’t having the Venezuelan experience.
Farm and related government policy
Despite low farm incomes, government program payments under the ARC-CO program have started to decline and will likely continue to do so for payments received in 2018. That said, this year will almost certainly be a big year for farm policy. Activity on the new farm bill should heat up and it will be important to see how this evolves. While it seems that budget dollars may be hard to come by, you never know how these things will work out.
The farm bill is just one of the big policy issues facing agriculture. Topping the list of other policy related items is probably trade policy. The rhetoric here has been troubling to farm groups who realize that trade is critical to almost every commodity group. This is particularly true given current commodity surpluses. Recently, the USDA Undersecretary for Trade and Foreign Agriculture Affairs told groups to develop “contingency plans” for a withdrawal from NAFTA. Good luck with that. Let’s hope that they aren’t needed. In the meantime, it appears that the Department of Agriculture is starting to work on some contingency plansthat could ease such an adjustment.
The next big issue has to be the renewable fuel standard, which seems to be under constant threat. How this one evolves will also be critical to U.S. ag, but particularly for those in Midwestern agriculture. Oh, and then there is the story about China’s ethanol proposal. This could be a big story or maybe not. Our guess is that slightly more clarity will come in 2018.
Finally, 2018 will be the first year under the new tax bill. As tax reform basically turned into a tax cut, farm accountants and farmers will be fully employed trying to decipher all the new tax code in 2018. Our guess is that the process of understanding this bill will take at least a year. For a head start, you can read some analysis of the farm implications on Paul Neiffer’s blog.
Will farm finances improve?
We cover the farm financial situation extensively so we won’t dwell too long on these issues today. We’ll just note that farm finances have held up relatively well in the face of a substantial downturn in farm income. The Purdue-CME ag economy barometer indicates that producer sentiment declined after stabilizing in 2017.
One doesn’t have to read too many articles on our site to see that the deterioration in farm finances is obvious in the economic data. Another down year certainly won’t help that situation. The most worrisome trend is probably the deterioration in working capital and repayment capacity. It appears that the financial situation is as poor as it has been for some time, and further declines would probably result in some turmoil in the sector. In short, sharply lower incomes again in 2018 would create severe stress. Careful financial management is critical in 2018.
Crop budgets and plans for 2018 – where will producers turn?
The good news is that the cost of production has declined significantly from just a few years ago. Most of these declines have come from lower fertilizer prices. Heading into 2018 it appears that fertilizer is starting to firm so producers may have to look elsewhere for further cost reductions. With capital expenditures at recent lows, one has to wonder if they can fall much further. Perhaps rents will fall again as current budgets don’t support current rental rates.
Last year was notable because American farmers planted nearly as many acres of soybean as corn. USDA even projected that soybean acreage would overtake corn in the future. USDA’s projected price range for corn is $2.85 to $3.55 and soybeans come in at $8.60 to $10.00. At these prices and based on current budgets, soybeans will again be very competitive. However, remember that relative prices can and do change quickly. Keep a close eye on prices of corn and soybeans in February as the crop insurance guarantee levels are set.
Along with the increase in soybean acres, the other big commodity story of the last few years is the continuing decline in wheat acres. At present, wheat prices are doing little to discourage another decline in wheat acres. Another new low in wheat acres seems more likely all the time. Still, USDA’s projected U.S. farm price range is higher than recent years, so maybe there is hope for wheat in 2019?
Big yields yet again?
The last few years have seen outstanding yields and the rebuilding of global commodity stockpiles. We have now had four successive years of above-trend corn yields. David pointed out last year that such a scenario isn’t all that uncommon. As he noted, over the last 35 years U.S. corn growers have achieved above-trend yields 61% of the time. The bottom line is that we’re not necessarily “due for” a below trend yield in 2018.
Rather, the unpredictable weather will decide it for us. The current drought monitor shows abnormally dry conditions across much of the U.S., but it’s very early. In fact, to our untrained eyes the map doesn’t look much different today than it did a year ago. Then there’s always the La Nina discussion to be had. You can learn all you want (and probably more) about La Nina – El Nino here. It’s probably best to start the year off by keeping track of the weather influencing the South American crop.
All this discussion about yields brings us to an important point. Not everyone around the country has had big yields in the past few years. Look for the most severe financial challenges to be found in regions that haven’t fared as well in the last few years.
Wrapping it up
As we head into 2018 it’s definitely true that the ag economy could use a good year. Commodity prices and farm incomes have fallen to the point where navigating the farm economy could best be described as challenging. Financial conditions are not great, but by no means crisis levels. Still, the ag economy still appears to be balanced on the knife’s edge. Given the reduced cost structure of agriculture, some relatively modest commodity price improvement would help the situation dramatically, but deterioration would make things a lot worse in a sector that has used up a significant amount of its financial reserves. Those in agriculture tend to be an optimistic bunch and with the turn of the calendar hope springs eternal for a year of improvement in the economic conditions facing agriculture. Here’s hoping that 2018 is the year!