Nov 23, 2020

Dramatic Recovery in 2020 Net Farm Income Could Hint at New Record

By: Tyne Morgan

As the 2020 harvest comes to a close, it’s a year marked with unknowns.

“This has been a phenomenal year with all sorts of market developments every month, we think we’ve got things figured out, and then the next month, something new happens,” says Pat Westhoff, director of the Food and Agricultural Policy Research Institute at the University of Missouri.

After declining farm financial outlooks this spring, farmer sentiments are now skyrocketing.

“Since bottoming out in April at a rating of 96, the Ag Economy Barometer has been rising pretty consistently, and this month, it set a new record high at a reading of 183,” says Jim Mintert of Purdue University.

Mintert was speaking about the October Ag Economy Barometer released earlier this month. It revealed farmer sentiments are even better than levels economists saw pre-pandemic. A major factor of the rising sentiments are the climbing commodity prices.

“In our area, what we’ve seen is cash corn prices increase from mid-August to today of about 23.9%,” says Alan Hoskins, president and national sales director, American Farm Mortgage and Financial Services based on Louisville, Ken.

As soybean prices hit $12 Sunday night, the fuel firing up the commodity markets continues to drive prices higher.

“We’re testing some levels we haven’t seen in a number of years,” says John Newton, chief economist, American Farm Bureau Federation (AFBF). “A lot of that is on the expectation that we’re going to export a record amount of soybeans and quite a lot of corn.”

Improving Net Farm Income Picture

Farmers in areas that experienced good yields this harvest, plus CFAP and other agriculture and COVID relief payments this year, caused the farm financial outlook to change quickly.

“In the last three months, it is completely, almost 180-degree turn around,” says Paul Neifer, Farm CPA with CLA.

Those factors are fueling an improving, yet cautious, net farm income outlook from the Kansas City Federal Reserve.

“I wouldn’t go so far as to say it necessarily represents an optimistic outlook for the sector, but it does represent a fairly significant rebound in terms of conditions from what we would have seen just four to five months earlier,” says Nate Kaufman, Omaha branch executive with the Federal Reserve Bank of Kansas City.

Kaufman says the biggest surprise from the latest report came in the scale of improvement in a short period of time.

“I had a lot of conversations with lenders and operators back in April and May, and they were very worried about what could potentially be a massive wave of bankruptcies,” he adds. “We went from that situation in April and May to an environment that’s maybe more optimistic than we saw even in the previous years.”

Ag lenders like Hoskins echo that sentiment, saying the tone among bankers and farmers has changed.

“I don’t think that we’re going to see the treading of water like what we’ve talked about the past three years,” says Hoskins. “I think we could see producers having some marked improvement in overall working capital.”

The infusion of cash is helping paint a brighter picture in grains, though it’s not a consistent story with livestock.

“On the livestock side, it may not be quite so clear cut how things come out,” says Pat Westhoff. “With livestock, our producers will see higher costs of production with higher feed costs.”

Even with the uncertainty with livestock, the overall improving net farm income outlook is multi-faceted.

“Government payments are going to be significant this year of 30 to 40%, and in some cases, larger on some farmers,” says Gary Schnitkey, farm management specialist, University of Illinois. “We have CFAP payments, WHIP+ happened to occur, as well. And then some farmers got PPP loans. So, all of those things are going to contribute to net farm income in 2020.

“I think there’s a very high probability that when USDA updates their farm income and statistics in February or March of 2021, that these higher commodity prices on top of CFAP2, which we now know more than $10 billion in CFAP2 payments have gone out the door, we’re definitely going to lift from that $103 billion net farm income level, and could be close to the record, which was $120 billion plus. So, we’re going to be very close to it.”

Tax Dilemma in 2020

A change in outlooks from government aid and improved prices, is also causing a revised game plan for tax planning.

“We’re almost busier right now with year-end tax planning for farmers than we are preparing tax returns on April 15,” says Neiffer.

He says as the income picture changed, tax planning conversations are crucial right now.

“Once they know their numbers, then they have to decide, ‘well, if I have a million dollar problem, do I buy machinery?” says Neiffer. “Do I prepay farm expenses that I’m going to use next year? Do I prepay rent?”

As a result of the new tax dilemma, lenders like Hoskins are seeing a renewed interest in farm equipment.

“We’ve not seen a lot of equipment trades over the past three to four years,” says Hoskins. “So, that piece of low-hour, late model equipment is becoming a little more scarce. From what I am seeing personally, and from stories that I’m hearing, that’s putting some producers in a position where they are looking at new.”

Land Values Gaining Strength

Big ticket items from machinery to land, Kansas City Fed found farmland values increased in every state, except Nebraska, from a year ago.

“I think that was also something that would have been surprising to people had you told them just given where things were in April, that we would be seeing increases in land values already,” says Kaufman.

The Chicago Federal Reserve also reported land values rose in every state they represent, with a 6% jump in Indiana alone. Farmer mac says record low interest rates are aiding that trend.

“At Farmer Mac, we look at the long-end of the curve where farm real estate, and that’s where we see a lot of activity,” says Jackson Takach, chief economist for Farmer Mac. “Certainly, with a low interest rate environment and flat yield curve, there’s a lot of upward pressure on real assets like farmland.”

As farmers, economists and ag lenders turn their focus to 2021, it’s a question of if these commodity prices can last.

“What it’s going to be all about is how much carries over into 2021, from 2020,” says Takach. “With the combination of government support program payments, and higher commodity prices towards the last few months of the year, that’s going to be a nice cash infusion into the sector after several years of being a little cash strapped.”

Spillover of Net Farm Income into 2021

As some of the cash sales farmers are making today are being pushed to next year, the rise in commodity prices may not show up until the 2021 balance sheet.

“The expectations for farmers for 2020, and maybe really more for 2021, is that there’s a lot more income floating around than they were counting on even three months ago,” says Neiffer.

Even as commodity prices improve, without CFAP or other ad hoc programs, some say it’s hard to make a case for improving net farm income in the new year.

“We will probably see higher farm income in 2021 than we projected previously, but I’m not sure it’ll be higher than 2020,” says Westhoff. “I think you’ll drop off in payments currently projected for 2021, and that may conceivably offset the increase in crop and livestock sales.”

Economists say the biggest driving factor will be how the covid-19 pandemic plays out.

“We need restaurants to come back and come back [with] strong retail sales,” says Newton. “Even though everyone’s at the grocery store, it’s still down $80 billion since March in terms of total retail spending, at restaurants, as well as food away from home.”

From a year of unknowns, to brighter outlooks among farmers, Hoskins says caution and discipline will prevail.

They were courageous in the challenging times,” says Hoskins. “Remember to have some conservatism in the positive times. And make sure how that working capital is deployed is consistent with the long-term goals of their operation, not their short-term desires.”

A balance of both as the farm financial ending to 2020 seems to be better than the start.

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