Experts concerned about 2019 ag economy
By: DairyBusiness News Team
The following is a summary of experts’ best estimates of what will happen in 2019
American Farmers & Ranchers: Over the past several months we have talked with agricultural economists and financial experts. The following story is a summary of their best estimates of what will happen in 2019.
Tim Koch, senior vice president and chief credit officer for Farm Credit Services of America
“There are signs 2019 could look very similar to 2018,” said Koch.
Koch breaks it down into crops and livestock with the impact weather and international trade will have on those two sectors in 2019. In areas where Mother Nature cooperated, crops prospered and the resulting yields made up some of the difference caused by low commodity prices.
“From a crop standpoint we will see a wide variation in overall financial performance,” Koch said. “But, a lot of the protein sectors performed very well in 2018. We will continue to be reliant on exports to chew through existing supplies.”
“We don’t know where trade will go (in 2019)” Koch said. “That’s the big wild card.”
Koch offers advice for agriculture producers in 2019.
“We encourage them to deal with the things they can control,” Koch said. “Understand production costs, seek the opportunity to be a low cost producer, focus on a disciplined market strategy and take (profit) margins where you can get them.”
Jackson Takach, lead economist for Farmer Mac
History doesn’t repeat itself but it sure does rhyme.
“Early projections of 2019 look a lot like 2018,” said Jackson Takach, lead economist for Farmer Mac.
Takach said if we don’t get a trade deal worked out with China, 2019 could be a twin of 2018.
“We export one out of every three rows of soybeans to China. So, when they increased the tariffs that put downward pressure on our prices, about a 25 percent price decline. If we can get those tariffs reduced, soybean prices could come up 25 percent.”
The Farmer Mac economist said grain producers will be negatively impacted the most if trade issues are not resolved going into 2019.
“Let’s say we don’t get a deal with China, soybean growers will switch to corn and wheat which would put downward pressure on those commodity prices, maybe some upward pressure on soybean prices,” Takach said.
For the livestock sector, the news is slightly better.
“For livestock producers, lower grain prices are a good thing, so they could actually see an improvement in profit margins in 2019 if grain prices stay low,” Takach said.
Takach offered this advice for producers going into the new year:
“Look very closely at the trade negotiations with China. Try to get a good sense of what your neighbors are going to plant. You want to do what the other guy is not doing. So, if you think everyone is going to switch to corn, maybe you hang in there with soybeans.”
He also encourages producers to watch interest rates.
“I think at least two raises (in interest rates) are highly likely. Farmers are highly exposed to rising interest rates. 2019 might be a bit of a sticker shock for your operating line.”
Nathan Kaufman, vice president and Omaha Branch executive, Federal Reserve Bank of Kansas City
Kaufman believes farmers will be caught in a squeeze as the general economy will continue strong in 2019 while the agriculture economy goes in the opposite direction.
“Interest rates have been rising in recognition of a sustained growth in the U.S. economy. In an average sense, interest expenses are relatively small for agriculture, but it does mean for producers who are highly leveraged are going to face additional headwinds from rising interest rates,” Kaufman said.
“I think the fact it has now been a prolonged environment of weakness, (in the farm economy) is where there is most concern. Lenders are now looking at loan renewal applications, and having to decide, how much longer we continue to do this, extend credit, recognizing the cash flow is still relatively weak.”
Is there any good news for 2019? Kaufman has to dig for a short term answer.
“I think it is difficult to see an environment where there is a lot of support for commodity prices getting back to a point where producers would say there are strong profit opportunities. I think there are reasons to be optimistic prices aren’t going to drop sharply, but we have to recognize there is a lot of production out there which will continue to weigh on prices.”
“The presence of risk mitigation programs, crop insurance and other things, will limit the downside risk to farm finances.”
Kim Anderson, Extension economist, Oklahoma State University
Anderson’s focus is on crop marketing and expects global demand to buoy wheat prices in 2019.
“I think for wheat producers it is going to be a relatively good year if they produce 12.5 percent protein and around 60 pound test weight per bushel. If not, they will have trouble selling it. The export market determines our prices and right now Russia is producing a high quality product and we have to match it.”
“The key to our wheat prices is what happens in Russia. If Russia turns off the spigot and reduces exports, then our prices are going to go up to $5.50, maybe even $6 per bushel as we approach June.”
Anderson’ optimism is based on a global shortage of high quality wheat.
“It’s projected that the world is going to consume more wheat than what was produced in 2018. The world is going to need our protein and test weight and they are going to pay for it.”
Derrell Peel, Extension economist, Oklahoma State University
Peel, who specializes in the livestock sector, said strong demand for meat protein in 2019 will bolster the outlook for producers in the coming year.
“Demand has been phenomenal, both domestic and internationally, and kept cattle prices strong,” Peel said. I expect that to continue in 2019.”
“The tariff issues have not dramatically impacted the beef industry yet, but we have to keep an eye on it.”
“I expect beef prices to be slightly higher in 2019. The cattle market has been and will continue to be a bright spot in 2019.”
Given the optimistic outlook, should cattle producers expand herds in 2019?
“Don’t change your plans, if you have expansion plans,” Peel said. “But, you want to keep an eye on the big picture, to stay on top of things so you can figure out if you need to react.”
Larry Sanders, Extension economist, and professor, Oklahoma State University
Sanders is well known for his work on agriculture policy and he sees a mixed bag for rural Oklahoma in 2019.
“Those counties with oil and gas income will be okay in 2019,” Sanders said. “For agriculture, if the trade issues are not resolved soon, there is the potential things could get even worse in 2019.”
Sanders said the good news is the NAFTA 2.0 trade pact. The new trade agreement, called the United States-Mexico-Canada Agreement or U.S.M.C.A. , is similar to the old NAFTA.
“For Oklahoma this is about the same as the old NAFTA, so there is less uncertainty, and that is a good thing when farmers are looking out ahead and planning for the future.”
“The new farm bill and the USDA budget will be resolved so it looks a lot like the past versions. If we don’t have an economic recession, then I think things will be okay for agriculture.”
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