Johansson: Outlook for agriculture industry remains strong, despite challenges

Washington, D.C. – “Many things have changed since last year, giving us plenty to talk about,” said USDA’s Chief Economist Robert Johansson during the Feb. 25-26 USDA Agricultural Outlook Forum.

Johansson cited events such as the apparent break in California’s record-breaking drought, the largest corn and soybeans crops produced in the U.S. and China’s impacts on global corn and cotton stocks.

“Farm productivity continues to advance, and exports are increasing, yet farm income has fallen over the last several years more quickly than at any time since the mid-1970s,” he added. “Market sentiment, like market signals, is mixed.”

Ecnomic well being

Johansson highlighted a number of indicies that all highlight increased optimism from farmers, consumers, businesses and home builders, compared to last year.

“Bankers seem more reflective, with the Federal Reserve survey of banks on the likelihood of loan repayment rates tracking fairly close to a declining index of corn prices received by farmers,” he said. “As corn prices fall, bankers believe they will see lower loan repayment rates.”

Regardless of general bankers’ concern, Johansson looked at farm income trends, farm programs and price outlook and how they impact the mixed sentiments reflected in the marketplace.

Income

“Farm income is headed sideways,” said Johansson. “When Congress debated the 2014 Farm Bill, the United States was recovering from the Great Recession and just coming off the highest levels of federal deficits since World War II.”

Farm income peaked at the same time in 2013, reaching $120 billion.

“Today, many producers are in a different situation,” he added. “Farm income has fallen dramatically since 2013, falling almost 30 percent in real terms.”

Johansson emphasized, “That is the largest four-year drop in farm income in 40 years, when real farm income fell more than 45 percent between 1973 and 1977.”

Despite those declines, farmland values remain strong, according to Johansson.

The debt-to-asset ratio of farmers is also relatively low, said Johansson, at 12.9 percent, up from the low point in 2012 at 11.3 percent and well below 1985’s 22.2 percent.

“With interest rates remaining low, high levels of debt are not associated with the very high interest payments we saw in the 1980s,” Johansson described. “At their peak, interest payments relative to net farm income in 1985 exceeded 60 percent. Today, they remain close to 20 percent.”

Land value

“Another place we might expect to see the tightening financial situation reflected is in land value and rental rates for farmland as farming profitability erodes,” Johansson said, noting that a large part of farm costs come from buying or rending land. “Land values are also the largest component of the relatively strong asset base of U.S. agriculture today.”

The National Agricultural Statistics Service has reported a slight decline in land rents and values recently, as compared to increases seen in 2011 and 2012.

Meat prices

Looking toward the livestock and dairy industries, Johansson said, “Lower feed costs and improved forage conditions provided the impetus for expansion of flocks and herds.”

“We project that total meat and poultry production will hit another record high of more than 100 billion pounds in 2017, as production of beef, pork, broiler and turkey all increase,” Johansson commented. “Milk production is also projected to reach a record 217.4 billion pounds in 2017, with later-year herd expansion and growth in milk per cow.”

Looking at beef production, Johansson said that supplies of cattle have increased, with the third straight year of herd expansion and falling feed prices, coupled with improved forage and pasture conditions, have continued to encourage expansion.

“Meat and poultry production in 2017 is expected to outpace demand,” Johansson said. “Thus, we are projecting lower prices for cattle and hogs, with broiler prices relatively flat compared to last year’s levels.”

He noted that fed steer prices are forecasted to drop seven percent to $112 per hundredweight.

Trade opportunity

“The marketing outlook shows opportunities for trade,” Johansson commented. “Increasing agricultural trade remains a key component of future growth in the agricultural economy.”

Strong competition and reduced demand reduced export sales for fiscal year 2016, but improved conditions continue to generate more demand for fiscal year 2017.

“Global gross domestic product per capita is forecast up 1.6 percent in 2017,” Johansson said, noting that income growth is expected in Brazil, Russia, India, Indonesia and China. “Overall, U.S. agricultural exports are forecast at $136 billion for fiscal year 2017, with a rebound in Chinese demand and strong export sales in the beginning of this year.”

Exports to China are projected to hit $22.3 billion, a $3 billion increase over last year, and exports to Canada and Mexico are also forecasted to increase.

“Domestic U.S. consumption can only grow so much, given our projection of U.S. population and income growth,” Johansson said. “Furthermore, U.S. livestock can only eat so much feed, and alternative uses such as ethanol are assumed to be relatively stable over the next 10 years.”

He continued, “As a result, increases in beef, pork, poultry, dairy, feed, food grains and oilseeds for the most part need to be sold abroad.”

Johansson and USDA note that long-run expectations support increases in trade, consumption, trade and prices, which lead to a continued competitive trade environment in 2017.

Johansson commented, “Over the next several years, the agricultural sector as a whole will continue to adjust to lower prices for most farm commodities in both the United States and abroad.”

Saige Albert is managing editor of the Wyoming Livestock Roundup and can be reached at saige@wylr.net