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Ag Economy Continues to Adjust, Says Hurt

by Darrell Boone

Published: Friday, February 17, 2017

According to Purdue Extension ag economist Chris Hurt, the problems with the U.S. farm economy are really pretty simple.

"Our crop prices are too low, and our costs are too high," said Hurt last week at the first session of the 2017 Wabash County adult farmer classes. "There's not a lot we can do about prices, but we need to keep working on pushing the cost structure lower."

To give a little background, Hurt told the audience that both U.S. corn and soybean yields had been above trend for the past three years, while wheat shot well above trend in 2016. As a result, 2016 ending stocks for soybeans were at their highest level in 10 years, corn the highest in 11 years, and wheat stocks were at their highest level in 30 years. Not surprisingly, the prices for nearby corn and wheat futures have bounced around at near-10-year lows, while soybeans have been modestly higher.

While this has had a depressing effect on commodity prices, Hurt said that it could have been worse had not exports and domestic usage been as robust as they've been. Exports for both corn and soybeans have been at a record pace for the 2016-17 marketing year, beginning in September of 2016.

Hurt said that it had been somewhat encouraging that after touching a futures price of $3 per bushel in August and September of 2016, corn had shown enough strength to recover to around the $3.60-level currently. He was cautiously hoping that producers would be able to look back at that $3 level as the low point of the market in this current cycle. Hurt also showed a chart which suggested that given the corn price trend thus far this year, coupled with historic seasonal patterns, made $3.80 or $3.90 futures in April or May a possibility.

In contrast, Hurt said that in February of 2016, cash soybeans in Indiana were running at $8.80 per bushel, and are currently a little over $10. He added that at over $10, whether it was old crop or new crop beans, doing some marketing now "makes some sense."

"From $8.80 to over $10 is a fairly substantial improvement, and that happened due to the poor South American crop, which was harvested during our spring," he said. "Now South America is in what would be like August to us, with some weather concerns, so this is a critical time for soybeans. Depending on the South American crop, and the possibility of four or five million more acres of soybeans in the U.S. next year, soybeans could either go higher or revert to around the $9 level at harvest time here."

Hurt said that while current nearby futures for corn, soybeans and wheat are at or somewhere near their 10-year lows, costs had followed commodity prices upward during the good years, and come down much slower. According to Purdue's 2017 budgets that include all costs, he said that many farmers who are paying cash rent and paying for their machinery are losing up to $90 per acre on average land, and are essentially living off their depreciation. Hurt's projections of costs and revenues through 2019 showed that the gap between costs and revenues would gradually narrow, reaching a hypothetical breakeven point around 2019.

"The costs are now considerably higher than prices, and in order to get back nearer to profitability, we need to continue working on getting the cost structure down," said Hurt.

In the meantime, Hurt encouraged his listeners to consider themselves being in a "five-year plan," for making it through the current downturn, which he said included the years 2014 through 2018.

"The good news is that we're in the middle year of that stretch, which means that the worst of it's behind us," he said. "But you're going to have to be patient, because you don't immediately burst out of a downturn."

Hurt said another factor that's going have a significant impact on agriculture is the election of President Trump. Hurt said that the reaction to his moving into the Oval Office has been positive from Wall Street and the business community, with the anticipation of a stimulus package that includes tax cuts, spending on infrastructure, and the rollback of many burdensome regulations.

However, those positive expectations have had the effect of a strengthening of the dollar, which makes American products more expensive for foreign buyers. Hurt said this was a concern, and had already been a factor in the low level of current farm commodity prices. However, he was even more concerned about another possibility.

"During the campaign, then-candidate Trump said a lot of bad things about Mexico and China, which are our two biggest trading partners," he said. "Those two markets are huge for us. That scares us in agriculture enormously, to have threats like that made against customers like those two countries."

Hurt said that while any new administration brings questions regarding how they will conduct business, this administration has brought more questions than usual. He said that commodity groups and ag interests had been doing their best to explain to the Trump administration the importance of international trade to agriculture.

"They're telling the Trump administration that agriculture is already in a weakened financial situation, and a trade war could be devastating to prices that are already low," he said. "Our hope is that this (Trump) is a business person who understands that you've got to have customers, and that you can't do things that are going to turn your prime customers away. We're just going to see how this goes, but it's making many of us in agriculture more than a little nervous."

Regarding land values, Hurt said that they had currently retreated about 12 to 13 percent from their peak in 2014, and he expected that values would drop an additional 12 or 13 percent before leveling off in 2019.

Tips for weathering the current downturn included reducing capital living expenses, cutting family living expenses, liquidating excess assets, seeking additional farm-related or off-farm income, and pursuing reduced cash rents. He also encouraged producers to evaluate their risk management strategies—including crop insurance, government payments and FSA disaster loans—carefully.

But his most important tip was to work with your lender as your financial assistant. Possible strategies there included restructuring time periods, letting your lender know as soon as possible if you can't fully repay your operating loan, and increasing borrowing against real assets.

"During these times, your lender is your financial bridge to help you get through this," he said.

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