As credit manager for MFA Incorporated, Jerome Gerke is in a prime position to assess the health of agriculture in our region.“In 2015, wet weather struck farms throughout MFA’s trade territory, reducing yield in some areas,” Gerke said. “Despite the wet weather, harvest yield reports so far have been good, leading to some optimism. However, grain prices have been down the last two years and nothing indicates they will go up any time soon.”
Some beef producers fared a bit better than crop growers in 2015, but times may be tough for all types of agricultural operations in 2016. We recruited Gerke and three other agricultural experts to forecast the agricultural economy and offer tips on how to succeed in these challenging times.
- Gerke is corporate credit manager for MFA Incorporated, a farm supply and grain marketing cooperative headquartered in Columbia, Missouri. MFA offers 30-day lines of credit to 40,000 farmers and provides $80 million for input financing, as well as agreements with John Deere Financial.
- Michael Boehlje is a professor of agricultural economics at Purdue University in West Lafayette, Ind. He teaches at the Center for Food and Agricultural Business and leads workshops for farmers and lenders.
- Chad Hart is an associate professor at Iowa State University’s Department of Economics in Ames. He previously worked for the Iowa State University Branch of the Food and Agricultural Policy Research Center.
- Bill Watson is president of UMB Bank’s Agribusiness Division in Kansas City. The American Bankers Association ranks UMB Bank as one of the top 40 agricultural banks in the nation.
Watson says the wet spring caused farmers to plan corn late and move many acres to soybeans. Many acres were left unplanted—perhaps more than any year in the last decade. “Low grain prices and rapidly falling cattle prices are creating tough times, and pressuring cash flows available for land and equipment payments,” Watson said. “While crop yields may be at or above normal, prices will make profits slim.”
Boehlje expanded on the price drop: “Prices showed softness in corn, wheat and particularly soybeans. Brazil is currently producing a good soybean crop, raising additional concern for soybean prices.”
Hart reported that USDA forecasts a large national harvest of corn and soybeans for the 2015 crop. “Large supplies often come with lower prices,” he warned.
We asked the experts to offer their views on the 2016 farm economy and suggest ways to manage through the crunch.
1. What do you project for grain prices in 2016?
Hart: The price outlook for 2016 is eerily similar to what we currently see. Large supplies, strong but limited demand, and building ending stocks trended over the last couple of years, and look likely to continue. Looking to the 2016 planting season, the major issue will be acreage allocation. Corn and soybeans dominated acreage over the past several years. Prices will likely remain lower until some acreage exits, but profit opportunities with competing crops have been limited.
Watson: Corn and soybean prices in 2016 depend heavily on final 2015 yield numbers, 2016 carryover and anticipated demand. The strong dollar is the American farmer’s worst enemy right now, and world events may worsen the situation. El Niño is predicted to affect weather in 2016, which typically means good to excellent growing conditions across the Midwest. This should translate into good yields, but yields may be offset by continued low grain prices. Hay and forage prices will continue to see downward pressure; solid rainfall makes for ample supply. Falling cattle markets will put price pressure on feed and forage producers.
Gerke: Input costs are reducing some, but looking at all costs per crop acre, average income looks to be at or slightly below breakeven. Some sources indicate that net farm income in our area could drop as much as 50 percent from 2013.
Boehlje: Don’t expect much improvement; from 2016 to 2018 we’ll be under continued price pressure. The world brought a lot of new land into production, and demand is down. The cost of producing grain will continue to put many income statements in the red.
2. What about livestock?
Watson: Livestock prices collapsed in recent months, tumbling from historic high levels at the first of the year and returning to price levels seen in late 2013. Current prices may represent a rush to market and may improve in 2016. But cattle profits for 2016 will be significantly lower than in 2014 and early 2015.
Hart: Projections for 2016 show more beef, pork, and poultry meat entering the market. Profitability in cow/calf operations drove expansion. With increased meat supplies, livestock prices worked their way down from record highs. Margins are mixed in the livestock complex. Lower feed costs have helped hold pork margins around breakeven; futures prices indicate above-breakeven returns for hogs through the spring and summer of 2016 as the grilling season heats up. Meanwhile, the strong but weakening feeder cattle market brought limited returns to cattle finishing, and futures prices indicate that current negative margins will hold until spring. Easing feeder cattle prices open up the potential for breakeven margins in late spring or early summer.
Boehlje: We’re coming off a period of good beef, pork and dairy prices. Pork and beef are rebuilding numbers. Pork and dairy are probably moving into a breakeven mode. The small operator with 40 or so cow/calf pairs will continue to do pretty well, although we’re starting to see pullback in what feeders will pay for calves. Beef feedlots won’t see the same profits they’ve seen in the last couple of years and are starting to encounter sizable losses as they pay high prices for feeder cattle, although this should mitigate in 2016. The livestock sector is moving into more modest profits as we’re not seeing the demand growth needed to cover costs. Still, livestock producers won’t see quite as much red ink as grain producers.
3. What’s happening with supply and demand?
Hart: Demand for grain reached record levels over the past year, but expect a slowdown. U.S. feed demand continues to build with livestock numbers. Corn usage via ethanol hit records through 2015, but growth is limited. Corn exports have been steady and soybean exports peaked, but advance export sales have lagged. Global financial concerns in China and Europe, along with the strength of the dollar, cast a cloud over the export picture. On the livestock side, demand has held up well given higher prices. Domestically, per-capita meat consumption is expected to rise, with beef and poultry leading the way. Meat export demand is expected to increase as well.
Boehlje: The rising value of the dollar and the global economic slowdown are softening export demand. In addition, the world is growing more acres. In the last couple of years, we saw 178 million additional acres harvested; that’s almost double the corn acreage in the United States, and represents an increase of about 9 percent of global production capacity. We built a bigger agriculture factory, and farmers hesitate to pull back. Farmers lose less money by continuing to farm, and price recovery takes longer than in other industries.
Watson: The dollar is the controlling factor for U.S.-based producers, making our meat and grain the most expensive in the world and depressing U.S. market values. El Niño moisture may boost U.S. crop production and negatively impact Asian production, providing increased demand that may partially overcome the dollar’s restraint.
4. What do you project for 2016 profitability?
Boehlje: Any projected 2016/2017 recovery to the grain sector will come from cost reductions rather than increased prices. Cost reductions don’t occur rapidly, but farmers have already started cutting costs, and will cut more in 2016. Grain producers enjoyed good times over the last five to seven years but, historically, the bad periods that follow last longer.
Hart: Producers who own most of their cropland and tightened up production costs will see profits, but many others will experience another year of losses in 2016. Crop agriculture had a strong run from 2007 to 2013. The last couple of years offset that run; expect more of the same in 2016. The livestock profitability picture is more positive, but it’s also in transition. For pork, spring and summer look good, fall and winter not so much. For beef, profits are mainly embedded in the calf sector, but finishing margins are projected to improve.
5. Are land values going down?
Watson: Prices for high-quality, tillable land are still rising but at a much more modest pace than seen in recent years. Lower quality production ground has topped out and begun to recede marginally across much of the Midwest. Grass and pasture land held its value, reflecting strong cattle profits in 2014 and early 2015. With cattle prices falling fast, expect pasture and grass land prices to top out and perhaps start dropping in 2016.
Hart: Recent data indicates that the land market is working its way down slowly. The Iowa Chapter of the Realtors Land Institute recently released survey results on land values. It found cropland values dropped nearly 4 percent over the last six months. Earlier studies by this group and Iowa State University Extension found that land values began to decline in 2014. Limited crop incomes suggest this will pick up steam.
Boehlje: In the Western Corn Belt we’ve seen an 8 to 10 percent decline in cropland prices. From the 2015/2016 crop year to 2018/2019, we expect a total 15 to 25 percent decline in cropland values. Pastureland prices are actually going up, but we expect them to flatten out.
6. What advice do you have for renters and landlords?
Hart: Land values, cash rents, and crop incomes tend to move together, so we expect to see rents decline—it’s already started. Renegotiating rents in a lower price environment is difficult—it’s easier to share a gain than a loss. My advice: Keep an open mind and communicate with each other. If the only conversation is about the lease, both parties go into the negotiation with limited, one-sided information. Farmland leasing is a people business—the more information shared, the more likely both parties can reach an equitable agreement.
Boehlje: Land rents went up more slowly than income in recent years, and rents typically go down more slowly. Farmers and landlords face tough negotiations and we’ll see more churn. Landowners need to acknowledge that prices just aren’t there to support last year’s rental prices. If you give up your current renter, can the next one pay the rent? Fewer operators want to rent at historically high prices. Renters want to hold onto established relationships so they will have that land when better prices return, but it’s important to think about your working capital burn rate. Do you have the working capital to lose money this year and next year? If not, your lender will ask tough questions.
Watson: 2015 was an active year for rent renegotiations. After years of no change, many landlords requested large increases in 2013 and 2014 based on good grain prices and increasing land values. When corn and soybean prices fell in late 2014, many renters found themselves in a difficult situation with cash rent expenses for 2015. In several instances, decades-old agreements were changed or abandoned by grain producers unable to make a profit on expensive ground. 2015 probably forced resolution to most issues, and 2016 will likely bring modest if any change in rents.
7. What’s happening with credit? If you were a farmer, how would you manage debt?
Gerke: Credit is still available at good rates. Interest rates should go up slightly in 2016 with the Fed’s first 0.25 percent increase likely in December 2015 and another in spring 2016. With debt rising and net income dropping, debt repayment will be an issue for at least the next two years. Demand for non-real estate financing has gone up and the trend will continue. The debt coverage ratio (loan repayment amount compared to income) is dropping, indicating that past-due loan payments will rise. Creditors will work with customers though low commodity prices. One year should not be a big issue, but if you continue to operate at or below breakeven, it could become a problem.
Watson: Credit should continue to be available to most producers, but expect more discussion of cash-flow adequacy. Rates should not change appreciably for 2016, at least not enough to materially impact profitability. Lenders will focus on the balance between input costs, yield production and grain prices, along with the potential for operational losses, especially with less efficient producers. Cattle operations face a strong potential for losses in falling markets and should prepare to reduce operational size until markets stabilize. Farmers should forego unnecessary expenses and capital purchases unless they are sure cash flows will cover land and equipment payments as well as unforeseen expenses.
Boehlje: Watch your cost per acre. Lenders won’t ask you to cut production operation expenses like fertilizer, but they will expect you to pull back on capital expenditures—especially equipment. We’re not expecting significant bankruptcies, but some farmers will have to downsize. The real issue is working capital—will you run out of cash? Renters face the most cash and liquidity problems, especially those paying high cash rents. Check out your repayment schedules; when times were good, farmers were borrowing on land for 10 years rather than 20, and on equipment for five years rather than seven. It may be time to renegotiate terms with your lenders.
Hart: Rumblings from the Federal Reserve suggest we will see higher interest rates in 2016. Now would be a good time to lock in interest rates where possible, conserve working capital and actively manage cash flow needs.
8. What’s your top trend for 2016?
Boehlje: This downturn may last four to five years. Farmers are creative in reducing costs so it won’t take that long to get back in the black. But any profit improvement must come from cost reductions. Government programs will buffer some losses—both farm program payments as well as crop insurance. However, today’s safety net is more responsive to market prices, and it’s not as strong as in the past—there are some holes in it. But it will help buy time for a year or two.
Hart: Over the past three years including 2015, we produced our three largest corn crops and two of our largest soybean crops. That strong production, even in the face of record demand, led to the lower prices we project to extend through 2016.
Gerke: With net income down and input costs still high compared to commodity prices, working capital will fall and farmers will require more input financing. According to the Federal Reserve Bank of Kansas City, demand for non-real estate credit in agriculture has increased $8 billion to $9 billion over the last two years, caused by low commodity prices and reduced cash reserves.
9. What’s your best advice?
Hart: Concentrate on cash flow and controlling costs. For most of the last 10 years, prices were strong, profits high, and producers invested in the latest technology, be it seed, machinery, or inputs. A lot of that investment was made without thinking about return, as profits were sizable enough to handle the risk. Now, return on investment is crucial. If the investment is not adding to the bottom line, it needs to be undone or it doesn’t need to happen.
Gerke: Reduce debt where possible, and reduce input costs without reducing yield potential. Can you sell any assets that are not critical? Use good agronomy practices to reduce costs but keep yield potential high; don’t cut costs without considering yield loss. Keep in contact with your lender; a good working relationship is essential during periods of reduced profit.
Watson: Focus on the spread between prices you receive and your input expenses. Mind your costs and be prepared to market grain and cattle when opportunities arise, not just at harvest.
Boehlje: Cut costs. Take a hard look at your cash. Make sure you have the financial resiliency to handle the financial downturn and the liquidity to make loan payments.