Even though strong demand remains constant, the high inventories are causing downward pressure on commodity prices. The result of this scenario is lowering overall net farm income.
This is depicted in Figure 1 showing U.S. net farm income climbing to a recent high of $123 billion in 2013, then declining to a forecast $59 billion for 2018.
The U.S. Department of Agriculture is forecasting a slight rise in 2019, then declining a bit and staying fairly stable for the next several years. The luxury of $100 billion net farm income, adjusted for inflation, is nowhere on the radar.
Many factors impact the overall well-being of America’s farmers and ranchers. Some are within control of the individual owner/operator, some are on a broader scale and are impacted by government actions, both domestic and foreign, and of course the role of Mother Nature.
Weather and climate
Agricultural producers are no strangers to the uncertainty of the weather and the perils it presents. Debate continues as to whether and what extent human actions are impacting the earth’s climate.
Beyond the climate change debate and whether more weather extremes are in the future, it is important to note that producers have more tools now than ever to help them manage risks associated with weather.
Each individual producer’s ability to use these tools, and how each chooses to manage not only weather-related risks, but also many other production, market and counterparty risks, will determine the level of each producer’s success in the difficult times ahead.
Global trade
The evolving globalization and increase in commerce between various countries has created many opportunities for agricultural commodities but has also created challenges and risks related to trade agreements.
As exports of American products and commodities have increased, so has the dependency on exports, escalating the need for agricultural producers to manage inventories and support prices.
In recent years, the U.S. dollar has strengthened compared to foreign currencies, which made our commodities more expensive for other countries to purchase.
In addition to the strong dollar, our administration has decided to renegotiate several trade agreements and invoke tariffs to improve U.S. manufacturers’ and agricultural producers’ competitiveness in the world market.
This creates anxiety among those on both sides of the trade. If U.S. negotiators are successful, it will hopefully benefit many industries, including agriculture, in the longer term. Let us not forget that the U.S. is the most coveted market by foreign countries and is the largest economy in the world, with a gross domestic product of nearly $20 trillion.
Hopefully, negotiators will be able to leverage the demand volume that is optimal for the U.S. during their discussions. The challenge is, as negotiations linger, our trading partners look elsewhere for their needs, jeopardizing years of hard work in developing markets for U.S. products. The outcome of these negotiations will have a significant impact on the U.S. agriculture outlook.
Taxes and interest rates
Other legislative and regulatory actions will impact agriculture’s future. Tax law changes have happened. Will the changes become permanent or revert back to 2017 status? How our government chooses to deal with border security and immigration issues could have a huge impact on certain agriculture sectors. Changes in health and energy policy, as well as the impending farm bill, will also play a vital role in the future of agriculture.
Another headwind for agriculture is input costs. Several input items have been forecast to increase in the next few years, including labor, pesticides, fertilizer, fuel and oil, and interest on borrowed financial capital.
As the U.S. economy continues to strengthen, unemployment rates continue to fall and the Federal Reserve tries to unwind its inflated balance sheet, one can expect interest rates to continue to rise.
They have already raised rates once this year with a strong possibility of two and maybe three more. Although debt levels in the farm sector are much lower than in the difficult decade of the 1980s, those with debt interest will experience a noticeable increase in cost.
The lower revenue received because of softer commodity prices, coupled with increased production costs, creates a landscape where producers have less margin for making management decision mistakes.
Gearing for slowdown
Another very important factor influencing the farm outlook is the current business cycle. One of the longest business cycles was from 1990 to 2001, with continued growth for 42 calendar quarters. The current business cycle growth started in 2007. Although it is one of the weakest or slowest rates of recovery in history, it continues its progression upward, into its 41st quarter.
Some economists say the inevitable downturn is in the not-too-distant future. With consumer spending driving the majority of economic growth, a recession would cause consumers to cut back on spending, which would reduce demand for many agricultural commodities. Strong domestic demand has been robust supporting prices, especially in the protein sector.
The next few years on the farm appear to be challenging. It will be a time to study every management decision carefully, and review and update the balance sheet often. In general, agriculture has a strong financial statement with a debt load that is very manageable. However, it will be easy for financial conditions to deteriorate during these challenging times without keen and prudent attention.
In the longer term, agriculture has a bright future. As the world population grows toward an expected 9 billion people by 2050 and medium per-capita income increases, it will bode well for agriculture. 
ILLUSTRATION: Illustration by Corey Lewis.
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Dan Childs
- Senior Agriculture Economics Consultant
- Noble Research Institute
- Email Dan Childs
