Sober, but Hopeful, Picture for Farm Economy

December 26, 2017 03:07 AM
Money Cash Dollars

The coming year is pivotal for agriculture because we will find out if we have entered a stabilization zone or if we begin another leg down, says Terry Barr, senior director, CoBank, Washington, D.C.

Barr, along with fellow nationally recognized ag economist David Kohl, highlighted key differences in the current setback in farmland values and the 1980s collapse at the American Society of Farm Managers and Rural Appraisers annual conference.

“The impact of energy prices on commodity prices will likely remain benign, with crude oil ranging from $45 to $60 a barrel,” Barr notes. “Meanwhile, world economies are still in transition after what their central banks and governments did to stimulate their economies out of the financial crisis. This means we will have sustainable, moderate growth in demand but not what’s needed for another explosive burst in demand for commodities.”

Barr says China was growing at up to 14% annually during the supercycle into 2013, but is growing at a 6% rate now.

“If you’re going to drive something powerful in commodities, it will probably come from the supply side rather than demand,” he says.

The U.S. economy is on very solid footing and is in one of its longest run-ups in history, Barr notes. “But there is no reason to believe we are on the brink of a recession,” he observes. “The recovery is very extended, but it is very subdued. The U.S. economy is only 14% larger than it was at the last business cycle high. Usually, the economy surges 35% to 50% greater than its previous peak before a recession occurs.”

Meanwhile, central banks have added $14 trillion to their balance sheets. The U.S. Federal Reserve added $3.5 trillion alone.

“The Federal Reserve is the only central bank raising interest rates,” Barr says. “This is strengthening the U.S. dollar and putting the U.S. in an uncompetitive position. I look for short-term interest rates to move to 2.5% to 3% by late 2019 as a result.”  

Overall, the next three to five years will still be challenging for agriculture as the world works through the hangovers from the massive stimulus injected into world economies to ward off the financial crisis. “But the long-term outlook is still very positive for agriculture as a resource-challenged world scrambles to feed and clothe its population,” Barr says.

“The 1980s was a credit bubble, now we’re in an asset bubble,” notes Kohl, professor emeritus, Virginia Tech. “This recent run-up in farmland values has much more equity and working capital behind it. Marginal land is the first to correct, and we’re seeing those values down as much as 25% in some areas.”

Looking ahead, Kohl is watching exports. “They are 20% of ag incomes,” he notes. Impacting that income stream is the value of the U.S. dollar, growth in the U.S. economy and interest rate policies of the Federal Reserve and the central banks of Europe, China and Japan. Any changes in U.S. trade policy could also adversely impact this key source of ag revenue.

With the world glut of grains, oilseeds and commodities, Kohl says it will take a surprising change in production to lift commodity prices. “The good news is global economic growth is synchronized. The emerging market economies are moving higher together, but they need to grow at a 7% to 9% annual pace to lift U.S. commodity prices.”

Fortunately, the exposure of U.S. agriculture to energy prices has decreased as the U.S. has become a major oil producer. “About $8 to $10 spent on ag inputs is spent on something related to oil,” he notes. “But the U.S. is no longer dependent on crude oil imports and has become a major producer. It use to be $60 to pump U.S. crude oil. Now it is closer to $40 a barrel and will soon be $20 a barrel.” That will help restrain input costs going forward.  


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Spell Check

Nicholville , NY
12/28/2017 06:33 AM

  Mortgaging land to pay for operating expenses is going out on a limb. Of course if you want to keep farming and that is the only option you might do it knowing you may lose everything inthe end. I see no problem mortgaging land to buy more land or to expand your operation.

portage, WI
12/27/2017 07:43 AM

  nothing will change for farmers. every one above us will keep telling us what we will pay and what we will be charged. yet try walking into any business like ford or chevy or walmart or mcdonalds and tell them what you will pay them they will laugh at you. but they keep saying farmers are their own boss but we will tell you what we will pay and charge you and we will do it to farmers with out benefits. farmers are the least respected most under paid job in America. I have friends in different jobs getting raises on and off. back 12 years ago I got 24.00 per hundred pounds of milk 5 years ago I got almost 25.00 now just below 14.00. shipped a beautiful cull cow last week and got 32 cents a pound. wish I would of dried her up and left her here. why are farmers paid any less than doctors or policemen or fire fighters or lawyers? we might need them some time in our life yet you need a farmer every day. I have a friend whos a cop he averages 45 to 55 hours a week his pay last year was just over a 100,ooo this year he said just over 105,000 and he does his job with a company vehicle all kinds of benefits and he laughs at me cause I have 50 hours in by Wednesday and I feed him for less than minimum wage most times.

bad axe, MI
12/27/2017 07:09 AM

  The problem this guy doesn't want you to know there won't be a upturn in the farm economy, first you went and exported all your technology off to all your competition (new JD and CIH combines in Russia on $300.00 acre farm land, Second the US credit marked debt is unserviceable, it was 4.7 trillion in the last downturn in the 80's (remember the saving and loan crisis of the 80's brought on buy going off the gold standard in 73) the credit market debt now is 70 trillion . there are 93.5 million workers in the US making on average $48,000.00 per year , it would take 15.5 years to pay that off if you applied all $48,000.00 per year of the wages of each and every worker ( no money to live on each and every dollar going to debt reduction ) . Third only 1.3 cubic miles of people ( if you line 2000 people shoulder to shoulder on a mile, line up 2500 row behind them in that mile , you have 5 million people in one layer in that square mile. now stack 1400 rows on top of that layer, one layer standing on the shoulders of the next layer in that square mile , that's about 7000 feet in the air or about 1.3 miles) that's the worlds population of 7 billion people in that square mile wright now. They say in the next 30 years were going to add 2 billion to the world's population (400 more layers or 1.7 cubic miles of people). When the world population hit 7 billion FOX news reported not to be alarmed you could fit all 7 billion in the city limits of LA in California , in one layer comfortably . So go out and mortgage your land up for more land and buy all the new technology to feed the world . To much exporting of technology , to much debt to service, and nobody to feed = farm doom (plane and simple finally the TRUTH about AG )


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