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Guardedly Optimistic on 2020
Friday, January 17, 2020 2:24PM CST
By Chris Clayton
DTN Ag Policy Editor

DES MOINES (DTN) -- Offering some insights into the economic situation of Midwest agricultural loan customers, Farm Credit Services is guardedly optimistic looking at the agricultural economy for 2020.

Jim Knuth, senior vice president of Farm Credit Services of America, highlighted some of the rationale for optimism during a breakout session Tuesday at the Land Expo 2020 in Des Moines.

FCSA is the largest agricultural lender in the upper Midwest, focusing on Iowa, Nebraska, South Dakota and Wyoming.

One reason for optimism is recent progress on trade agreements, following a couple of years of tariffs and trade disputes. Just since Knuth spoke earlier this week, the president signed a deal with China with the promise to boost agricultural exports, and the Senate gave final approval to the U.S.-Mexico-Canada Agreement. "We're going to get these trade agreements and there is some optimism we're going to get some more of these demand drivers," Knuth said.

Further helping boost income, Knuth said USDA will likely provide a third tranche of Market Facilitation Program (MFP) payments from the 2019 program. Going further, Knuth said "there is a decent chance" USDA will announce a separate 2020 payment, but that will likely be the last. "The fact is it is going to be politically popular," Knuth said. "Both sides of the aisle support farmers and agriculture."

Knuth later told DTN a new program for 2020 will depend on the market direction over the next several months as the market absorbs these trade deals.

Another area for optimism is the expectation that interest rates will remain low. Knuth said the Federal Reserve tends to remain "neutral" during election years. Long-term interest rates remain favorable in 2020. "So we think interest rates will again be a positive for agriculture in 2020," he said.

USDA on Wednesday encouraged farmers to enroll for the Agricultural Risk Coverage (ARC) and Price Loss Coverage (PLC) programs. The deadline to enroll for the 2019 crop year is March 15. USDA anticipates roughly 1.5 million producers to sign up for the programs, but fewer than 300,000 producers have signed up so far.

Knuth encouraged farmers to spend time and get educated on their ARC/PLC options. Farmers also should look at the best safety-net option for tying their ARC/PLC enrollment with crop-insurance risk management decisions, he said. Also don't just repeat the 2014 ARC/PLC decision. "Don't leave dollars on the table," he said. "This is how you succeed at the business of agriculture.

"If you do that, you might leave dollars on the table," he said.

In 2018, FCSA showed more than 71% of its producer borrowers in FCSA's four-state area were profitable. About 66% of producers cash-flowed their operation and loan payments, and 77% had positive working capital. Just looking at grain operations, the numbers in those three categories were comparable. Knuth anticipates those numbers will be stronger once 2019 results are tallied, and potentially 80% of FCSA's farmer-borrowers will end up profitable for the year.

"Our results are clearly trending higher than 2018," Knuth said.

The pain of the economic cycle is not just affecting small producers, Knuth said. Just like businesses at all sizes are succeeding, there are operations of all sizes struggling as well.

In looking at traits of successful grain producers, Knuth said the biggest-single factor for in determining profitability is whether those farmers manage their operations as a business.

That means they are reviewing and analyzing their numbers on a regular basis, and they prioritize their marketing plans. Those producers are also more willing to seek professional help, whether it's agronomic, accounting or marketing. Another trait of these producers is they are becoming better at negotiating rent, input costs and sales.

Another trait of successful grain farmers right now is they are re-thinking how they use machinery and equipment. Buying a piece of equipment might not be the best option. Instead, the view is "I make money by utilizing machinery and equipment," Knuth said.

A business-oriented grain producer right now is also more willing to recognize poor business arrangements and walk away from them if necessary. Sharing some food for thought, Knuth said selling assets, be it equipment or land, may be one of the best decisions you can make for long-term viability of your operation.

Offering some other food for thought, Knuth said farmers should consider big yields as a blessing, not a given. A business plan needs to work with more trend-line yields.

Looking at farm sales, Knuth said other farmers buying that land are still driving the market and the number of sales in Iowa has stabilized over the past five years. While land values have crept downward overall in Iowa, Nebraska and South Dakota, Knuth said land values overall "have been a gift to the farm cycle" over the past few years compared to the price collapse in the 1980s.

"Frankly, the land value stability is probably the best we could have hoped for," he said.

The preferred method of farm sales are public auctions, accounting for more than 40% of sales over the past six years. Farmers are still the dominant buyers, making up more than three-quarters of buys over that same period. The amount of speculative buyers is limited, Knuth said, noting that buying and selling land isn't comparable to most speculative activities.

Chris Clayton can be reached at Chris Clayton@dtn.com

Follow him on Twitter @ChrisClaytonDTN

(KD\SK)


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