A New Farm Bill Is Right Around the Corner:
Given that the 2018 Farm Bill is fast approaching, debate on the structure of the next bill is picking up. Looking beyond the minutia, the salient question between now and September 2018 is whether continuity or change will carry the day. In light of the current backdrop for farm income, we would expect to see a push to expand the size of the conservation reserve program (CRP). Nevertheless, any CRP expansion will likely face uphill resistance on the Hill, as the CRP program is generally unpopular with taxpayers and parts of the agribusiness community.
Improvements to the ARC/PLC formulas are more likely to succeed, as tweaks are feasible without a major farm bill overhaul. On the other hand, a revamp of the Dairy Margin Protection Program is unlikely to succeed, owing to budgetary constraints. Despite the program being widely viewed as inadequate by the dairy industry, a satisfactory outcome for farmers is doubtful given political realities. Of course, there are also those who would like to “drain the swamp” or something to that effect. That will be a tough row to hoe for those running for re-election during next-year’s midterm elections. What’s more, any collateral damage to the farm sector from potential trade wars would only exacerbate the political reality of falling farmer income. So more of the same is probably a safe bet at this point.
US Farm Credit Metrics are Still Pointing Down:
USDA-FSA set a record last year for loan commitments, as farmers looked to shore up their working capital and restructure existing debt. FSA loan activity in 2017 is on par with last year, despite a drop in commercial loan origination in Q4:16--largely related to lower-than-expected agricultural input costs. Yet, we believe commercial credit availability will likely tighten during 2017 if early crop price forecasts come true. As such, US farm credit metrics will definitely deteriorate further in 2017. In fact, the USDA is forecasting that US farmland debt-to-asset ratio will climb to the highest level since 2012. Even so, the USDA expects bankruptcy rates to remain below 2 percent per 10,000 farms, a far cry from the 1980s where the rate was nearly 10 times that projection.
While pivot points such as an early return of El Niño or trade wars are difficult to predict, several participants in the farm credit system that we talked to are already bracing for a 20 percent or greater drop (i.e 2014 peak) in cash rents before the current US farm recession ends. Looking forward, it isn’t a further fall in crop prices, but stagnation that farmers really fear. In a worst-case scenario, stagnate farm income levels and falling land values would force farmers, particularly those who levered up in the post-2006 period to start posting more collateral to secure future working capital loans. Let’s hope it doesn’t come to that…
Is an India Trade Reset Inching Closer to Reality?
We detected an even greater emphasis on India this year. India has been prominently represented on the agenda in past years, but demonetization in India and the trade stance of a new US administration added greater weight to the country’s long-term demand potential this year. Despite being the world’s second most populous country, the country ranked only 17th as an importer of agricultural products between 2011 and 2013. Current trade policy protects the country’s farmers—a fact that Canada’s pulse growers can strongly attest to this year. However, demographics, rising disposable income, and production constraints are conspiring to reverse the country’s recitence to fully opening its agricultural markets to free trade.
Of course, the country’s agriculture sector is aiming to boost food supply by strengthening input delivery systems, expanding irrigation coverage, investing in rural logistics, increasing adoption of information technology, and building more storage capacity. Yet, rising production will not be sufficient to prevent India from dramatically growing its imports of key commodities, such as dairy, wheat, and sugar in the next decade, if, at least, one of the USDA Ag Outlook forum panelists is correct.
Although Mexico and China are front and center of the current trade hoopla, we wouldn’t be surprised to hear more talk of a forward-looking trade deal between the United States and India. A new administration looking to reset the current global paradigm will also need a few alternative trade deals to offset any failure elsewhere. Given that over 50 percent of the country’s workers are involved in the agriculture sector, a substantial step up in government funding for indirect support (i.e.irrigation, storage) programs would likely be required for trade liberalization to have a chance.
Brazil’s Agriculture Sector Standouts in a Dreary Economy:
Inflation appears to be finally under control in Brazil after a bruising recession, or so says CEPEA. Inflation is projected to reach the government’s target rate of 4.5 percent in 2017, which should allow Brazil to reduce the benchmark interest rate to below 10 percent by the end of the year. To be clear, that is a long ways from a robust economic recovery. Even if the proper economic reforms are adopted, a full recovery of the estimated 8 percent drop in per capita GDP that occurred between 2014 and 2016 may take years. Even so, the potential for a rebound in household spending capacity should be welcome relief to the country’s food processing industry.
The overall agriculture sector should be a relatively bright spot for the country. Production prospects for cereals and oilseeds are strong this season and and global Ag input prices are lower. Another wildcard for the country is whether Mexico and the United States stumble into a trade war. Although it could be an initial positive for the country’s corn, soybean, and meat producers, too much of a good thing could turn sour if higher exports ultimately drive up feed costs.
South America is Gradually Addressing Infrastructure Constraints:
Since the election of President Mauricio Macri last year, the potential for Argentina to climb the rank of global grains exporters has been widely touted. Much attention has been given to the country’s tax policy and the accuracy of domestic supply forecasts. Yet, the country’s latent potential is also constrained by logistics. While Argentina has more of its roads paved compared to Brazil, the country’s heavy reliance on truck movement for grains can not only result in major bottlenecks after harvest, but also impact the price competitiveness of the country’s grain exports. Without greater infrastructure investment, recent government reforms alone will not be sufficient.
To improve the competitiveness of the agriculture sector, the country has announced a 4-year plan to invest approximately $13 billion in the construction of 2,800km of new highways and the improvement or repair of another 4,000km of roads. Improving infrastructure, albeit in slow fashion, in South America is a real concern for US farmers. As such, panelists at the conference called for a renewed focus on infrastructure investments by the US government to ensure the country’s exports remain competitive.