The Black Swan

Investopedia defines a Black Swan as “an unpredictable event that is beyond what is normally expected of a situation and has potentially severe consequences.” The Black Swan has appeared in 2020 in the form of the coronavirus, or COVID-19. The ultimate impact to the economy, and the duration of the impacts from the outbreak and social distancing policy, are unknown. However, the economic realities of the situation to Nebraska agriculture are starting to become clearer.

• Prices for Nebraska-produced commodities have dropped significantly since the first signs of COVID-19 in China. Figure 1, created by John Newton, economist at American Farm Bureau, shows the percentage declines in futures prices for several commodities beginning January 14 through March 17. Falling oil prices, down roughly 60 percent, tumbling equity markets, off 30 percent, and the unknowns concerning the overall economy and the agricultural economy have all contributed to the decline in prices. As an example of the impacts, Kansas State Agricultural Economist Glynn Tonsor estimated the price drop in feeder cattle could cost cow/calf producers $58/head on 550-pound calves based on price projections by the Livestock Market Information Center.

Figure 1. Cumulative Percentage Change in Commodity Futures Prices

• Supply chain disruptions due to transportation troubles are a growing concern. For livestock, animals need to be fed and cared for, so the timely delivery of feed and veterinary supplies are vital. A slowdown in livestock processing could affect the movement of animals off the farm and create backups in the chain. On the crop side, Nebraska farmers are set to plant crops in the coming weeks. Timely supplies of seed, fertilizer, chemicals, fuel, and machinery parts are a must when the planting window is open. Most of the supplies should already be in position in preparation for planting season, but a few snafus could still materialize.
• Plunging oil prices, declining gasoline prices, and reduced gasoline purchases have increased the financial stress on ethanol plants. Ethanol producers began the year with negligible margins, if any, and the outbreak has pushed margins well into negative territory. Most observers expect plants to idle or reduce production. Nebraska is the second-largest ethanol producing state. A reduction in production could affect not only the plants and employees, but corn producers with sales to plants and livestock producers who buy distillers grains.
• Agriculture, like other industries, struggled to secure an adequate labor force even prior to the outbreak. Thus, the potential for lost labor due to illness as the infection spreads could be even more problematic. The livestock sector could be particularly vulnerable. A slowdown in meat processing could create a backlog of livestock in the feeding sector. And, animals will still need to be fed. For the crop sector, adequate labor for input suppliers is necessary. The return of university and high school students to the farm/ranch due to school closings might help supplement labor needs on the farm/ranch and related industries.
• The amount of debt taken on by agricultural operations has been growing in recent years. One positive for agriculture is the slashing of interest rates by the Federal Reserve which should lower borrowing costs. Lower interest rates should support land values and shore-up equity on balance sheets.

Unfortunately, the Black Swan has come home to roost at a time when agriculture in Nebraska is already financially struggling. In the end, though, Nebraska agriculture is amazingly resilient, and it will find a way to weather this too.