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by Matthew Ernst

Farm country in the United States saw historic levels of prevented planting for row crops this spring after devastating floods in some areas and excessive water elsewhere. Add to that a bumper crop of uncertainty around international trade, and it is no wonder that producer perspectives on capital investments this winter are as varied as the weather.

Are producers seeing any bright signs as the summer winds on? One measure of farmer sentiment says outlooks are improving. The Purdue/CME Group Ag Economy Barometer, which monthly surveys 400 producers to measure changes in sentiment, rebounded in June and July after capturing plenty of pessimism in its data in May.

Since crop conditions and market prices have huge impacts on whether producers will make winter investments, here’s a roundup of the outlook for major agricultural products as Ag Innovator goes to press in August.

Trade Impacts

A big reason for uncertainty in agriculture—especially in the Corn Belt—is the outlook for how soon the trade war with China will end. Three out of four farmers surveyed by Purdue/CME Group in July believed the trade dispute will eventually resolve favorably for agriculture. They just do not see the end of the dispute coming soon.

Soybeans are taking the biggest hit from China’s retaliatory tariffs, along with specialty crops like cherries and tree nuts.

The trade war is coloring meat markets, too. An outbreak of African swine fever has reduced China’s hog populations, and U.S. pork exports to China jumped in May and June.

“The industry faces opportunities to export record volumes of pork, but also faces continued trade issues with China that could restrict the level of those pork export sales and shipments,” said Chris Hurt, Purdue livestock marketing specialist.

For crop producers, USDA is repeating this year the Market Facilitation Program (MFP) payments it introduced in 2018. More than $14 billion in direct payments start in August; observers think that will only stop some of the bleeding on farm balance sheets.

“For many farmers, the MFP payments are being used to pay off operating notes and keep things going for another year. If the payments stop or decline significantly, then we could see much more stress in the farm sector,” said Mykel Taylor, Kansas State University Extension, speaking in July at the Kansas City Fed’s Agricultural Symposium.

Bankers surveyed by the St. Louis Fed said trade is the biggest risk for farm country. 

“Perhaps not surprisingly, a little less than two-thirds of the respondents indicated that an adverse trade outcome presents the most significant risk to the farm sector this year. Rising interest rates and declining land prices were generally not viewed as significant risks to the farm sector in 2019,” stated the Fed in its Agricultural Finance Monitor report.

Corn

Corn country has been stressed, especially in the early season. Illinois corn acreage was only 50 percent planted on June 1, a month behind average; Iowa plantings were three weeks behind the five-year average. Illinois corn was only 36 percent silked on July 22, compared to 96 percent last year; Iowa corn was silking a week behind the five-year average.

The markets are paying outsized attention to the corn crop.

“There is ongoing concern about how the season will end for the late-planted crop, including whether it will mature before frost,” said Emerson Nafziger, University of Illinois agronomist.

Late plantings are also prone to summer heat stress. A weather market caused some rise in corn futures earlier this summer, but the University of Illinois outlook for prospective corn yields and price shows less-than-stellar profitability projections.

There still could be some surprises, and it may take longer than usual for those to factor into the markets because of late and prevented plantings.

“When you look at the difference between a May 15 planting and a June 1, you’re looking at a pretty rough situation, in terms of the probability of getting to full maturity before a killing frost comes,” said Dan O’Brien, Kansas State University. “We’ve got a lot of potential for great price volatility heading into fall.”

Weather concerns helped an early summer rise in U.S. corn futures prices, impacting ethanol production and corn exports, and U.S. livestock feeders will likely see pressure from higher feed costs.

Soybeans

Soybean price outlooks at Ag Innovator press time pegged profitability below breakeven for many regions.

“I ran several farm plans this year, and the result was the same for nearly everyone. Soybean prices below $9 resulted in a net loss,” said Danny Morris, University of Tennessee Extension area specialist for farm management.

Too many soybeans are available globally to push U.S. soy prices higher. “With what looks like larger crops in South America, I think export competition next year is going to be quite fierce,” said Todd Hubbs, Illinois soybean marketing specialist.

Diseases reducing numbers in China’s swine herd, and swine depopulations elsewhere in Asia and Europe, is also bad for U.S. soybean demand abroad.

“(African swine fever) looks like a multi-year event that could hurt soybean demand in general,” Hubbs said.

There are also U.S. yield worries.

“The only path to good yield potential this year will be through a turn to unusually favorable weather, with good rainfall and temperatures in August and good rainfall and above-normal temperatures in September,” Nafziger said. “If in mid-August we see fields with dark green leaves, we can have hope for good—if not great—yields.”

Soybean yield loss, although bad for profitability this year, might not be bad for market prices in the longer term.

“The soybean market needs a production loss to whittle away at the mountain of stocks,” explained Todd Davis, economist at the Western Kentucky Research and Education Center. “Otherwise, the market will muddle through lower prices to stimulate use and discourage production. Mother Nature might be providing a quicker route to lower stocks and higher soybean prices.” 

Wheat, Cotton & Specialty Crops

The National Association of Wheat Growers issued the tersest statements of the major agricultural commodity groups concerning the USDA trade assistance package: “The MFP payments will provide necessary assistance to growers impacted by low prices resulting in part from tariffs. However, this is a band-aid when we really need a long-term fix,” stated NAWG President and Texas farmer Ben Scholz. “NAWG understands holding China accountable for its WTO violations and unfair trade practices, but a trade war is not the solution, especially when farmers are the casualties.”

The wheat sector saw favorable export trends this summer, especially from the EU and markets served by Australia, where drought is impacting yields. But profitability outlooks remain slim for wheat, as for corn and soybeans.

The cotton sector also continues with surpluses; some futures contracts reached lows in July. Experts say the best cotton managers will still be profitable this year, depending on yield.

Specialty crops (perishables) experience different market forces than commodities, but some specialty sectors are feeling the same trade crunch as soybeans. 

The Northwest Horticultural Council, which represents the region’s cherry, apple and pear producers, has made its top trade priority for 2019 the removal of Section 232 (steel and aluminum) and Section 301 retaliatory tariffs. Recognizing the impact on some specialty crop producers, MFP payments will be made to producers of fresh sweet cherries, cranberries, grapes and tree nuts. 

Pork & Poultry

A bump in corn prices, combined with hog price trends, has many pork producers barely above breakeven, said Purdue’s Hurt. His latest outlook sees producers clearing $2 per hog this year—a slim margin for error, especially after a 2018 season in which pork producers lost money.

Poultry trade helped draw down frozen stocks through June, with increases to Mexico and other important markets, including South Africa and Vietnam. Egg prices were weak this summer, because of oversupply, and that also bumped up trade demand for less expensive U.S. egg products, especially shell eggs.

It is feasible that some commodity crop producers could look at poultry contracts as a way to spread out enterprise risk. Turkey prices nationally are stronger this year, with USDA predicting a modest increase for 2020. How that translates to possible expansion at the farm level is always a regional question.

Beef & Dairy

Cattle feeders are enjoying lower feed prices while the U.S. is at the top of the beef cycle. “There are a lot of cattle on feed, but that is pretty normal at the peak of the cycle,” said David Anderson, Texas A&M, writing for the Livestock Marketing Information Center. 

Hurt agreed: “Some strength in prices can be anticipated for 2020 with the small increase in beef production and potential strength in exports.”

Cow-calf profitability, especially with no shortage of hay and other feeds for the winter, appears to be holding across the Southeast and into the Plains. 

The dairy industry continues to fight tight margins, with consolidation or retirement continuing among many smaller dairies. There was some strength this summer in domestic dairy demand, especially for cheese, and that caused USDA to slightly raise its price forecast this summer.

Like other agriculture groups, the dairy industry wants “trade not aid,” said Jim Mulhern, National Milk Producers Federation president and CEO. “Resolving the current trade impasse with China and aggressively expanding ties with other trading partners also is essential to make these aid packages unnecessary. We are also working with the administration and Congress to pass USMCA, which would immediately create new opportunities for U.S. dairy.”

Will There Be Farm Capital Spent this Winter?

Even with MFP payments, and other crop insurance payouts to mitigate losses, the outlook remains mixed on how willing producers will be to make capital investments. Some signs are positive, especially where summer rains are falling in row crop country. The Purdue/CME barometer registered a 30-point rise in producer opinion about making large investments in machinery and buildings from May to July. 

But farm financial experts remain mixed about whether producers will be more willing to make capital investments this winter. Some say more farmland sales this year show producers are selling poorer-quality land to restructure operating loans into longer-term debt; perspectives vary greatly from region to region.

“I don’t believe that either the land market, or the farm economy in general, is totally described by national statistics,” said K-State’s Taylor. “There’s heterogeneity in the land market and across farmers that is not well described by regional and national trends in farm income. We have many farmers who have lost money during this downturn and are highly vulnerable to either a drought or continued depressed market prices.”

Will the 1980s repeat? Experts say it’s unlikely, but even with new government programs that are helping relieve financial pressure, optimism in farm country does not abound. Consolidations are underway, depending on the region, and plenty of producers are more seriously considering retirement.

“Even though this may not be as bad as the 1980s, it’s still a tough time for agriculture. And the longer it lasts, the harder it will be for many farmers to bounce back,” Taylor said. 

Matthew Ernst is an agriculture writer based near St. Louis. He grew up on a commercial crop-and-livestock farm on the East Coast. His writing focuses on farm business management, marketing, and policy.