The Van Trump Report

Coronavirus and Crude Oil Casting Dark Clouds Over Farm Income in 2020

I’ve been on a ton of calls this week and many in the ag space are rightfully worried. If prices remain at these levels or perhaps even lower, many farm families will find themselves in dire financial circumstances. The complications of coronavirus along with the fallout in crude oil has created a dangerous one-two punch for many inside the industry. I would like to tell everyone that it’s all going to work out and be fine but I know for some that will simply not be the case.

The good people at the Department of Agricultural and Consumer Economics from the University of Illinois as well as the Department of Agricultural, Environmental and Development Economics at Ohio State University, have put together their outlook for income levels this year based on the facts at hand and projections for how hard COVID-19 may hit the ag industry. You can read it in its entirety HERE.

I can’t stress enough, during times like this it is mission-critical to be in full-communication with your lenders, key vendors, customers, and support teams. Keep your head up and have a plan, things are going to move fast! We will get past this but the question for many of us is how much damage will we sustain in the process? Below are some of the conversations I’ve been a part of and questions that are being asked:

  • Financial Position Pre-2020: This is one of the bigger concerns, that many producers already looked beaten up going into 2020. Producers have risen and answered the bell in each of the previous down rounds. The question many lenders and investors are now asking is how beaten-up are the producers and can they handle another flurry of heavy-handed punches? Net incomes on average were down considerably in 2019 as compared to 2018 levels but stayed near the 5-year average with the help of the MFP payments, crop insurance coverage, and additional assistance on Prevent Plant acres through Wildfire and Hurricane Indemnity Program Plus payments. Let’s keep in mind, corn prices here in the U.S. have spent the majority of its time sub-$4.00 since the summer of 2014. Meaning, some producers may have been holding their breath underwater for an extended period.
  • Insurance Prices are Lower: 2020 projected prices for crop insurance sold in Midwest states were $3.88 per bushel for corn and $9.17 per bushel for soybeans. Both corn and soybean projected prices were below last year’s level. The $3.88 projected price for corn in 2020 is -$0.12 lower than the $4.00 projected price for 2019. The $9.17 soybean projected price for 2020 is -$0.35 per bushel below the $9.54 projected price for 2019.
  • Is Storage Creating False Security? Some insiders argue that the massive amounts of storage that have been built by U.S. producers the past several years might actually be creating more complications. There’s been the argument the past few years by some large market investors that U.S. storage by default is positioning us as the world’s ancillary supplier. Producers in Argentina, Brazil, Russia, Ukraine, etc… who have much less on-farm storage simply grow the crop, harvest, and sell it, making it readily available on the global marketplace. Here at home, a larger portion of our crop is being held back on the farm and giving the market a sense of security. Unfortunately, with more global acres of corn being grown at improved yields, we quickly get to the next season and another foreign producer harvests and again floods the market with supply. Look right now, many U.S. producers are still holding old-crop supply, yet both flat-price and the basis have gotten hammered. If you think back in time, rarely was this the case. But now our farmers hold back more supply and we quickly get to the South American growing season, where production has dramatically grown larger.
  • Strength of the U.S. Dollar: It goes without saying, the strength of the U.S. dollar compared to our global export competitor’s currency has weighed on overall demand and competitiveness. Just look at Brazil, their producers are simply harvesting another record crop, selling it out of the field, and, because of the currency valuations, banking record cash sales. While here at home we can’t even come close to breakeven. As producers of commoditized agriculture, we have to remind ourselves we are in the export business. Like it or not we have to stay competitive with our export competition.
  • Too Many Acres… Never before has the world looked to the U.S. as a high-cost producer, but here we are. I’ve traded a long time and in a lot of different markets, but one rule is constant, anytime a market deems itself as “oversupplied” it has one job and one job only… push prices hard enough and low enough that it drives out the highest cost producer in an attempt to reduce overall global supply and balance the marketplace. There are some arguments circulating that government subsidy and safety-nets are inadvertently helping to keep too many U.S. acres in production. New and improved technology has also helped many producers who are farming on less quality soil become more competitive. At some point, the number of acres will have to come down to work towards balancing supply or prices will simply continue to tumble lower. Look at what’s happening in crude oil, the market is now swimming in supply, meaning the world’s lowest-cost producers and those with the least amount of debt will be best suited to survive.

My advice… Hang in there! Even the best and most solvent are having to rethink strategy. I’ve heard more producers talking to providers of 5G and solar about longer-term leases. I’ve also heard some producers pivoting back to a bit of livestock and or a few more specialty crops trying to capture a premium. I’ve also heard more producers trying to find ways to go more direct to end-users to work towards saving some margin. I’m certainly not claiming to have any enlightening insight or magic wand that makes all of this go away. In fact, I’m deeply concerned about many of my farming friends and families. I’m hoping the government can provide some further short-term relief, but unfortunately, I still see deeper long-term problems for those who find themselves in the category of a higher-cost producer in this increasingly competitive global marketplace.

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