Farm downturn near bottom, but road to recovery filled with potholes

Source: By Donnelle Eller, Des Moines Register • Posted: Thursday, February 23, 2017

Iowa farmland values dropped 5.9 percent this past year, marking the third straight year land values have dropped. Register photos]

When it comes to the farm downturn, experts agree: Losses are shrinking, and corn and soybean prices are stabilizing.

But farming could teeter between profits and losses for a couple of years as agriculture works its way out of a recession, they say.

“Things are beginning to move in the right direction, but there are a lot of things that could go wrong,” said Chad Hart, an Iowa State University economist.

Tough talk about trade with Mexico, China and other big ag markets could delay a farm recovery, Hart and others said.

President Donald Trump last month floated the idea of imposing a 20 percent import tax on goods from Mexico, China and other countries with U.S. trade surpluses.

This week, a Mexican senator said he wants to introduce legislation that would have the country look to Brazil and Argentina for corn instead of the U.S. Mexico is the U.S.’s largest customer for corn.

“That rhetoric, if it results in damaging trade policy, could pull demand down. If it slips, we could see prices go down … and we could be back in that financial hole,” Hart said.

Hart and Ernie Goss, an economist at Creighton University in Omaha, believe farming has hit bottom, that loud thunk that enables the industry to work its way back to profitability.

“We’re at the bottom of the trough, trying to work our way back,” Hart said.

Goss said agriculture probably bottomed out last year, “but we’re still not in positive territory,” he said. “The negatives are just getting less negative.”

Goss surveys rural bank CEOs in Iowa and nine other states with large farm and energy economies. February is the 18th straight month the index has showed weakness.

About half of those surveyed said their economies are stagnant, with no growth; 32 percent see a modest downturn and 2 percent see a deep recession, according to the Rural Mainstreet Index, released this week. Only 15 percent see modest growth.

The weakened farm industry has rippled through Iowa’s economy, affecting ag manufacturing and rural retailers.

Jason Henderson, an associate dean at the University of Purdue, said university economists don’t expect the ag downturn to hit bottom and begin improving until 2019.

That’s when “revenue will cover the cost of crop production,” said Henderson, director of Purdue Extension.

Economists expect revenue to be flat this year in corn- and soybean-heavy states such as Indiana and Iowa, but they should pick up in 2018 and 2019, Henderson said. At the same time, the costs to grow crops will be flat this year, and start declining in 2018 and 2019.

ISU’s Hart said the outlook for farming in Iowa looks a lot less dire this year than it did a year ago.

Even though U.S. farm income this year is projected to fall for a fourth consecutive year, the declines are mostly shrinking, Hart said.

Farm income will drop 8.7 percent this year to $62.3 billion, according to U.S. Department of Agriculture estimates. It’s about half of the $123 billion farmers earned in 2013, a record high.

Slightly more than half of U.S. farm households in recent years have lost money on their ag operations, the USDA said, but most have helped cover losses with off-farm income.

Hart said futures prices for corn and soybeans are better than a year ago, and close to break-even prices — around $3.60 a bushel for corn, and $9.60 to $9.70 for soybeans, based on ISU production-cost estimates.

Prices are near break-even for pork and beef producers as well. “We’ve watched prices slowly come back. It’s not great, but it’s not terrible,” Hart said.

Overall, farm debt levels are relatively low, Hart said. “When we look at repayment rates, they remain relatively high,” he said.

Hurt by a global recession, Deere & Co., the big farm equipment manufacturer, said Friday that key farm markets may be stabilizing.

Soft farm and construction markets pushed first-quarter earnings down 24 percent, to $194 million, compared with a year ago, the Moline, Ill., company said.

Deere, Iowa’s largest manufacturer, expects farm equipment sales to decline as much as 10 percent in the U.S. and Canada this year, while South American tractor and combine sales are expected to be as much as 20 percent higher. Overall, farm and turf sales are forecast to be 3 percent higher.

Purdue’s Henderson said farmers will avoid the crisis of the 1980s by not taking on too much debt. So far, farmers are cutting costs where they can, including selling some equipment or land to reduce the size of their operation.

That’s helped minimize loan defaults and bankruptcies, he said.

More difficult decisions, such as continued tough discussions about prices to rent farmland, will likely be needed as the industry works to escape the downturn, Henderson said. “There are still a lot of risks on the horizon.”

Hart agreed. U.S. farmers will likely find new markets if they lose access to key export countries such as Mexico or China. But it will take a while.

Strong international markets have been key to absorbing four years of record or near-record U.S. grain production. “Things will get better, but it will be a loss even in the long run — for both sides,” Hart said.