After setting records in 2011 and 2012, profits should be healthy again in 2013
A trifecta of strong exports, low interest rates and higher productivity should produce continued healthy agricultural profits in 2013, a Chicago Federal Reserve Board economist told a group of 200 farmers in Decatur, Ill., earlier this week.
"Agriculture should be healthy" in 2013, says David Oppedahl, a business economist in the Chicago Fed, noting that profits levels set records in 2011 and will again in 2012. "The lingering effects of the drought could cause some issues, although we could expect world trade to pick up more, and that could help to boost agriculture’s profits."
Speaking at the Farmland Value and Leasing Conference this week, Oppedahl said it's necessary to look to the 1970s to find agriculture returns as high as they have been for the last two years. Thanks to federal crop insurance payments, 2012 profits are expected to exceed 2011 levels, even after accounting for inflation.
"When you account for everything together for agriculture, the finances are in pretty good shape. The two best years in the last 30 to 40 are right now," Oppedahl said, including the dairy and livestock industries in the equation. The USDA has predicted record farm incomes for this year.
Risks to Forecast
The economist added several caveats to his forecast. A divided federal government needs to act soon to prevent the economy from going over a "fiscal cliff." Europe could fall into a recession given its precarious financial situation. And an unexpected event could derail current high demand for corn and soybeans.
Nevertheless, he counts on agriculture to have a good year in 2013. Corn and soybean yields, he said, should return to normal. Crop prices may seem high today, but they were higher in the 1970s and 1980s after adjustments for inflation. "We have seen these crop prices before. We just haven’t seen them in nominal terms. It’s really nothing new to agriculture."
In the meantime, the economist is counting on strong world demand for U.S. agricultural products to continue. "Trade is expected to grow in agricultural goods, even if there been some slowdown in other areas. Certainly the trend has been very positive, and the U.S. has maintained a positive balance in agricultural trade. That’s something that will help boost us next year."
Agriculture accounts for about 9% of U.S. exports. Foreign growth has slowed recently, dampening demand for U.S. goods. But Oppedahl expects world growth to rebound next year, "rising above 4% again after dropping down closer to 3% this year."
A weak dollar helps the export situation. The dollar’s value peaked in 2002 and has been dropping ever since, with occasional temporary upticks. "We’re in the range underneath where we were 20 years ago. We’re not seeing the dollar’s benefit being as strong, which actually benefits exports. When you denominate the sale in dollars, people are able to buy that more easily, when the dollar is weaker."
What's Up with Farmland Values?
In the meantime, farmland values continue to rise, particularly in the Midwest, where Fed surveys show a 20% increase in the last year. The rate of increase slowed to 15% in the second quarter. Adjusted for inflation, farmland values in the Midwest are higher than they were in the mid-1980s, the last time they peaked. "It doesn’t seem like there’s a tremendous slowing," he says.
"Where do farmland values go now? The fundamentals are favoring future increases ... with the productivity (gains) and high (corn and soybean) prices. But there is that uncertainty. One of the risks right now is government policy."
The federal government gridlocked over a farm bill before the Nov. 6 election, and the election didn’t do much to change the balance of power. The outcome, as a result, is uncertain.
But Oppedahl opines that, on a macroeconomic level, farmers can expect less government support in the future, given the need to address huge federal deficits. "Under current budget situation, you’d expect that farm supports would be lower than they were in the previous era, no matter how (the farm bill) gets resolved," he says.
Interest rates, on the other hand, aren’t expected to rise much. In fact, Oppedahl doesn’t see them rising much in the next couple years as the Fed attempts to bring down the nation’s chronically high unemployment rate. It may take a couple years, he says, to get unemployment below 7%.
The Fed is focused on stimulating economic growth to help create jobs. Second-quarter GDP numbers showed increases in personal consumption, residential investment and government spending. "Net exports had helped to get us going, and now there’s been some slackness there."
"The expectation is that growth will start to increase (next year), especially if we can deal with the fiscal cliff, maybe up toward 3%, and 4%, by the end of this forecast period. In the next few years, we would expect to see improved growth."
Rising demand for U.S. agricultural products, both bulk and high-value products, may be a big influence on that scenario.
"There’s a lot of growth potential out there because there’s demand in the world for food," Oppedahl says. "And we have a comparative advantage in the Midwest. We have good-quality ground. We have very strong productivity. We have the ability to feed people as they move up the income ladder."
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Despite Drought, Record-High Farm Incomes Expected
Input Prices to Stay Steady, Go Slightly Higher in 2013