2018 AG ECONOMY OUTLOOK NORTH DAKOTA BANKERS ASSOCIATION 66 TH LEGISLATIVE SESSION

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1 2018 AG ECONOMY OUTLOOK NORTH DAKOTA BANKERS ASSOCIATION 66 TH LEGISLATIVE SESSION

2 TABLE OF CONTENTS 2017 U.S. Farm Income Outlook U.S. Farm Income Outlook... 5 Agriculture Outlook... 6 Crop Outlooks/Receipts... 6 Livestock Outlooks/Receipts... 7 Government Subsidies... 8 Production Expenses... 8 North Dakota Outlook... 8 Current Trade Deals Statuses... 9 USMCA... 9 USDA Trade Aid Package... 9 China... 9 Trans-Pacific Partnership Agricultural Lending Outlook Summary

3 2017 U.S. FARM INCOME OUTLOOK 1 In 2017, the United States Department of Agriculture s (USDA) Economic Research Service (ERS) predicted that national farm income, which is a strong indicator of farm well-being in the United States, would be $63.4 billion. This was a 3% increase from The preceding three years had seen a decline in farm income after income peaked in 2013 following 2012 s high commodity prices. Net farm income is calculated based on accrual, and net cash income is determined on a cash-flow basis. Both farm income and cash flow was projected to increase by 12.6% in 2017 due to large inventory sales in The net income forecast was significantly below the 10 year average, and would be the second lowest year since The reason behind the low income forecast is due to low commodity prices for corn, soybeans, and cotton. However, livestock and most other crop prices are still below average for after record highs in Since 2013, farm income is down 49% and cash income is down 36%. Production expenses decreased slightly, but not at the same pace as commodity prices and revenue; this has contributed to lower aggregate income. Poor farm revenues have been offset by more government payments since The payments totaled $13 billion, which was lower than There are two revenue support programs used which expected to trigger $8.4 billion in payments which was an increase since 2016; the programs are the Price Loss Coverage (PLC) and Agricultural Risk Coverage (ARC) programs. From , the agricultural industry and farm income totals saw great times due to strong export markets and commodity prices. Markets in 2017 were forecasted with an 8% increase (or $139.8 billion) because the economic outlook in numerous foreign importing markets was improving, but even with the 8% increase, the export market is still below the 2014 record. Agricultural exports in the United States account for 33% of farm sector gross earnings. Farm wealth was also predicted to rise by 4% in Much of the farm sector s financial performance is based on land asset values, and in 2017 farmland value has increased due to the slight increase in farm income. Farmland values account for approximately 81% of the farm sector s assets. When examining farm household income, the average household income has been doing very well since the 1990s. The average farm household income in 2015 was approximately $119,880 which his higher than the average U.S. household income, 1 This section is based on a U.S. Farm Income Outlook for 2017 report done by the United States Department of Agriculture. 3

4 which is $79,263. Average farm household income includes off-farm income sources; this could include spousal income and possibly a second income for producers. At the end of 2017, it was projected that the economy would stabilize, although commodity prices were still below average, which signaled to farmers more tight years would come. 4

5 2018 U.S. FARM INCOME OUTLOOK 2 Summary Heading into 2018, the farm income outlook was dependent upon continued foreign and domestic market growth to sustain prices. Improvements in the agricultural economy also hinged on crop harvests and prices, both at home and abroad. In 2018, the USDA forecasted farm income to be $65.7 billion, which is a 13% dip from This forecast did not include any trade package government payments announced by the USDA in July. Production expenses have increased, while net farm income has decreased due to lower cash returns and lower government payments. Net cash income is projected to be lower in 2018 at approximately $91.5 billion. Net farm income for 2018 is still below the 10-year average, and would be the lowest since 2016 (in nominal and adjusted for inflation). The reason for a low income is due to continued weak commodity prices, and the lack of foreign markets. Net farm income is projected at a 47% loss, and net cash income is projected at a 32% loss from Production expenses have risen by 1.6%, which has contributed to lower income amounts. Government payments are projected to be down due to lower payments under the PLC and ARC revenue support programs. Payments are expected to be reduced by 50%. Agricultural export markets are a point of contention in The forecast expects export markets to be flat, which is due to abundant supplies in international markets and strong competition from foreign competitors. The ongoing trade dispute will shift trade patterns, but the overall value of United States exports is expected to remain consistent. Despite the poor farm income outlook, farm wealth is expected to rise 1.2%, to $3 trillion. Farmland values are also expected to rise by 1.9%, which comes on the back of a 2.3%rise in In 2016, farm household incomes (which includes off-farm income) was $117,918, and the average U.S. household income was $83,143, putting the farm household income 42% above the national average. Belt tightening is expected to continue again this year due to lower net farm income and weak prices for most major crops. The agricultural industry s well-being depends on domestic and foreign market growth. It is expected there will be record soybean and corn crops this year, which may bring an oversupply of those commodities. Additionally, the financial health of the sector will hinge on domestic and 2 This includes information from the 2017 Farm Income Outlook and from the 2018 Farm Income Outlook from the USDA, 5

6 international economics and factors including interest rates, economic growth, and consumer demand. General Agriculture Outlook The 2017 wheat plantings have dropped to 32.7 million acres, which is the lowest it s been since This is due to poor wheat commodity prices over the past couple of years, and soybean prices have been quite profitable, so farmers have focused on growing soybeans. Dry conditions continue to plague the south and northern plains, which raised concerns for cattle producers and commodity producers who did not have access to irrigation. The cattle sector is concerned about grazing options and the ability to find affordable and feed grains throughout the year. The Corn Belt and Southeast received favorable growing conditions, and thus the USDA has forecasted large harvests for corn, soybeans, rice, and cotton. Crop Outlook/Receipts The two major crops grown in the United States are corn and soybeans. The growth and output of these two crops in the past several years has helped build stockpiles at the end of the marketing year. This led to soybean plantings exceeding corn plantings in 2018; soybean acres totaled 89.6 million acres, and corn acres totaled 89.1 million. It is expected soybeans will produce a record yield of 52.8 bushels/acre in 2018, bringing in 4.7 billion bushels. However, this will pressure soybean prices lower to approximately $8.60/bushel. Corn yields are expected to make a national record of bushels/acre on average, which is an increase from It is expected 14.8 billion bushels will be harvested. Corn prices are expected to remain strong and even bring a slightly higher dollar amount due to the large domestic use for livestock feed, ethanol production, industrial processing, seed, and other uses. Strong exports are also a contributing factor. The average price is expected to be $3.50/bushel. Crop sales are expected to be $197.8 billion, which is down from Commodity prices peaked in 2012 due to a nationwide drought. The crop sector includes the following crops: Feed Crops (corn, barley, oats, sorghum, and hay) Oil Crops (soybeans, peanuts, and other oilseeds) Food Grains (wheat and rice) Fruits and Nuts Vegetables and Melons Cotton All other crops (tobacco, sugar, greenhouse, and nursery crops, etc.) 6

7 Feed crop prices are projected at $55.2 billion; oil crops are expected at $43.2 billion; food grains are expected at $11.5 billion; fruits and nuts at $30.4 billion; vegetables and melons at $19.1 billion; cotton at $7.9 billion; all other expected at $29.2 billion. Livestock Outlook/Receipts Cattle and other livestock herds, such as hogs and poultry are expected to grow in Cow-calf producers saw record production and market prices in 2014, and due to the markets, many producers started to expand herd size. The reason behind continued expansion in 2018 is due to the biological response, meaning when producers bought more cows to increase herd size, those cows and heifers are now maturing and having calves. Due to numerous droughts in the Southern Plains, ranchers have been strapped to find affordable feeding options for their cattle because pasture and range conditions limit what the cattle can eat. Lower prices are expected to continue through 2019 because of the rebuilding and expansion phase ranchers went through in 2014, even though markets both domestic and foreign have a high demand for meat all meat including beef, pork, and poultry. In 2018, all meat is expected to see an increase in production. The USDA predicts that combined domestic and foreign market exports will expand meat production and help support prices and profit margins. Production will still increase in 2019, but at slower rates. The factor which makes the livestock market volatile are feed costs. Higher rations, suggest greater profitability. In 2014, the cattle, hog, and broiler feed margins all trended upward in 2014, but since then have experienced volatility. Hog, cattle, and broiler producers are able to remain profitable, while red meat and poultry producers are vulnerable. Milk producers experienced a sharp decline in profitability, which has forced many producers out of the market, due to high feed costs and low profitability, which has caused financial difficulty. While milk production is expected to grow in 2019, milk prices will come under substantial pressure. The USDA is predicting milk prices to go up slightly in the next year. Livestock receipt sectors include: cattle, hogs, sheep, poultry & eggs, dairy, and other species. From , livestock receipts continued to grow; at its peak, livestock receipts totaled $212.8 billion saw a decline in major livestock categories, and in 2017 the livestock sector recovered with an 8.1% growth, which totaled $176 billion is expected to see a flat increase of about 0.1%, totaling $176.2 billion. Highlights include: Cattle and calf sales totaling $66.6 billion Hog sales totaling: $19.4 billion 7

8 Poultry and egg sales totaling: $47.8 billion Dairy sales totaling: $35.1 billion Miscellaneous totaling: $7.2 billion Government Subsidies Government program payments are projected down by 18.6% in 2018 due to lower payments under the PLC and ARC programs. Government payments will represent a small part of projected gross cash income in The importance of government subsidies will vary depending on the crop and livestock sector, and the region in which a producer sits. No payments under the marketing loan program will be made because crop prices are expected to remain above most program loan rates. The Margin Protection Program will make approximately $218 million in MPP payments. Conservation program payments are expected to total $3.9 billion. Additionally, disaster relief payments are expected to total $1.655 billion. Production Expenses Total production expenses for 2018 are expected to increase 3.3% totaling $365.9 billion. An index price comparison of prices paid vs. price received has shown that prices received has generally declined from , came back in 2017, and again declined in Input prices have shown a similar pattern, but with less of a decline in This suggests farm profit margins have been tight for the past four years. Crop and livestock farms experience production costs differently. Livestock farms experience feed costs, animal purchases, farm labor, etc.; these expenses are expected to continue to increase throughout the rest of Crop production expenses, such as fuel and land rent are expected to increase, while fertilizer is expected to decrease. North Dakota Outlook 3 Commodities in North Dakota still play an enormous role in the state s economy. In 2017, it was predicted there would be market and regulatory stability, however, now it is dependent on how the trade dispute with China works out, and how the new trade deal with Mexico and Canada works. Commodities in North Dakota have a wide outreach, which plays an integral role in the state economy health, particularly in rural areas. NAFTA played a major role in North Dakota agricultural production; 85% of exports went to Canada and Mexico. The effects of the new trade deal are yet to be determined. Agricultural and energy products accounted for 22 out of the top 25 exported goods for the last four years. 3 Coming from this report: 8

9 CURRENT U.S. TRADE DEAL STATUSES USMCA In October 2018, President Trump announced a new trade deal between the United States, Mexico, and Canada, commonly referred to as USMCA. The USMCA would replace the North American Free Trade Agreement, or commonly known as NAFTA. The USMCA is expected to go into effect on January 1, USDA Trade Aid Package 4 The United States exports almost 50% of its soybean production and approximately 15% of corn production; this makes these two commodities critical for farm sector profitability and regional economic success. Once the trade dispute with many of the foreign countries that purchase United States soybeans, the USDA announced a trade aid package that would provide up to $12 billion in support; it is designed to help offset the negative price and lost income due to the lost commodity markets. The aid package would provide payments to producers who grow: soybeans, corn, cotton, sorghum, wheat, hogs, and dairy, which would total $4.7 billion. In addition, the package would also include $1.2 billion in government purchases of excess food supplies and an extra $200 million in trade promotion. The package would increase net farm income by $70.4 billion, assuming that the entire $4.7 billion is distributed in China In July 2018, U.S. Trade Representative, Robert Lighthizer, announced the United States would begin imposing a 25% tariff on approximately $34 billion worth of Chinese goods. 5 This action elicited a response from the Chinese, in which $34 billion worth of American goods had tariffs imposed on. After this response, President Trump ordered another round of tariffs on Chinese imports; the authority to do this comes from Section 301 of the Trade Act of Again, China retaliated with another round of tariffs on American goods. China has tariffed U.S. soybeans, corn, wheat, sorghum, fresh fruit, nuts, select dairy products, American pork products, as well as cocoa powder, frozen vegetables, chemical products, and certain aircraft. 6 In a statement, Secretary of Agriculture, Sonny Perdue, stated agricultural producers have been treated unfairly by China s illegal trading practices and have taken 4 Information from 2018 Farm Income Outlook from USDA

10 a disproportionate hit when it comes to illegal retaliatory tariffs. 7 Iowa Secretary of Agriculture, Mike Naig, said the trade conflict came at the worst time. 8 Approximately 71% of soybeans grown in North Dakota are exported to Asia, which brought in over $1 billion worth of revenue to North Dakota. 9 The American Soybean Association has expressed disappointment in the Trump Administration s decision regarding trade with China. 10 The state of U.S. trade with China remains uncertain for the near future. Trans-Pacific Partnership 11 On January 23, 2017, the United States withdrew from the Trans-Pacific Partnership (TPP) via a Presidential Memo signed by President Trump. In April of 2018, President Donald Trump stated the United States may rejoin the Trans-Pacific Partnership. Since April of 2018, no other statement or action has been taken in order to bring the United States back into the TPP See, Footnote Id. 11 Information from 10

11 AGRICULTURAL LENDING OUTLOOK The American Bankers Association (ABA) has said lending has increased for farming operations, but income is decreasing, which means debt is increasing. 12 In 2017, according to the ABA s Farm Bank Performance Report showed banks that loan to farmers have increased lending by 6% or anywhere from $5.9 billion to $106 billion. While the agricultural sector is becoming weaker, agricultural lenders are willing work with their customers. 13 Despite the weakening ag sector, banks are still strong; over 96% of banks remaining profitable, and over 50% are reporting an increase in earnings. 14 In the Plains region 15, the farm banks increased loans by 5.1% or approximately $2 billion. 16 Agricultural production loans rose to $21.4 billion and farmland loans rose to $18.9 billion. Profitability was maintained in the Plains region, while the median return on assets held steady, while equity fell slightly. 17 According to the ABA, the Plains region farm banks had a median Tier 1 risk-based capital ratio of 15.5 percent a slight increase from the previous year Id. 14 Id. 15 The ABA defines Plains Region as Colorado, Kansas, North Dakota, Nevada, New Mexico, Oklahoma, South Dakota, and Texas Id. 18 Id. 11