Welcome to Agriculture Economic Tidbits, a weekly e-newsletter (emailed Mondays) for farmer and rancher members of Nebraska Farm Bureau. Agriculture Economics Tidbits will provide you with timely tidbits of economic information and policy analysis focused on Nebraska’s largest industry, agriculture, and its key players, Nebraska’s farmers and ranchers. The newsletter will break down global and national economic trends and what they mean for Nebraska agriculture, stay abreast of latest market movements, and provide the latest results from Farm Bureau research on current policy issues like property taxes, school funding, farm programs and international trade—all with the goal of helping you maintain a viable farming or ranching operation.
The longevity and toll of the COVID-19 outbreak has confounded nearly everyone. Most producers, businesses, and people have transitioned to a new normal after the initial shock of the pandemic. This year’s outcomes will depend largely on how much longer COVID-19 will continue to cause disruptions and slow the economy. Whether the additional assistance proposed by the Biden administration will come to fruition will play a role in how quickly the economy responds post-COVID-19. For agriculture, COVID-19 resulted in large shifts in food demand. Preliminary data suggest food service sales in 2020 were off over 19 percent compared to the year prior, while grocery store sales were up over 10 percent. This shift in impacted the varieties of beef and pork cuts consumers wanted. How long will this continue into 2021? Gasoline and ethanol consumption are still below pre-pandemic levels. Will people return to the road? Will COVID-19 have any impact on input supplies as planting season approaches? Answers to these questions will chart the course for agriculture this year.
Income growth in agriculture over the past two years has been fueled by increased government assistance through Market Facilitation Payments and COVID-19 assistance. It’s hard to imagine the level of assistance producers received during the past two years continuing this year. The Biden Administration is hoping to pass another COVID-19 assistance package, but no word on what it might contain for agriculture. Climate change promises to be a major focal point for the new administration. President Biden once said, “We see farmers making American agriculture first in the world to achieve net-zero emissions and gaining new sources of income in the process.” Look for initiatives from the USDA centered on paying producers to capture carbon or otherwise providing credits to contribute to environmental sustainability.
Black swans are unpredictable events that are beyond what is normally expected and have potentially severe consequences. By definition, they are rare. Yet the past two years have seen two such events impact Nebraska agriculture: a blizzard, late spring rains, and floods in 2019 and COVID-19 in 2020. Is another black swan in the offing for 2021? The odds would suggest not, but it seems like the odds have changed in recent years. Best to be prepared.
Agriculture has a bit of a skip in its step as 2021 begins. Tailwinds include higher commodity and livestock prices, greater exports, continued low interest rates, and stabilized financial conditions. Headwinds for 2021 include the ongoing drought, the lingering COVID-19 pandemic, and higher feed costs for livestock producers. The year will have its own story to tell when 2021 ends. Here’s to hoping it’s a happy story for Nebraska agriculture.
“Our knowledge is more uncertain than we’d like. We assign a much higher probability to our own opinions than warranted. Everything we see is filtered through the lens of wanting to be right.” Shane Parrish
This week, Tidbits contains the second part of a three-part series on the financial state of Nebraska farms and ranches coming out of 2020. This edition discusses various measurements of underlying financial conditions. Last week’s edition focused on net farm income. Next week, Tidbits will look ahead to what 2021 might hold.
Over the past few years, agricultural operations have taken on more debt, seen working capital decline, and a few operations have fallen behind on loan repayments. The Nebraska Farm Business, Inc. (NFBI) reported the average total debt of its participating members was $1.4 million in 2019, an increase of 40 percent over a 5-year period. NFBI also said one-third of the operations entered 2020 with negative working capital. In other words, the operations did not have enough cash on hand or inventory to sell to pay short-term debts.
County cash rent data from the USDA shows moderate increases in rental rates between 2017-2020. Pasture rent increased 4.0 percent on average, dryland rent increased 1.0 percent, and rent on irrigated land increased 1.4 percent on average. The moderate increases in cropland rents are reflective of the stabilization and improvement of farm income since 2017.
The Lincoln Journal Star reported on January 17 that 34 farm bankruptcies were filed in Nebraska in 2020, four fewer than filed in 2019 (Figure 4). However, 2020 filings will still exceed the average number filed since 2001, slightly more than 20 filings a year. According to the U.S. Bankruptcy Court, through the 12-month period ending September 30, 29 bankruptcies were filed in Nebraska. Over the same period, the Midwest states led the nation in Chapter 12 bankruptcies filed (Wisconsin-76; Kansas-35; Iowa-34; Minnesota-34). The relatively high rate of bankruptcies compared to previous years shows the continued financial pressures on some farm and ranch operations.
Coming out of 2020 farm income is higher, loan demand is down, farm loan repayments rates have improved, farm bankruptcies are off slightly, land values are steady to slightly better, and other measures of farm finances have either stabilized or improved. Thus, financial conditions for the bulk of agricultural operations is better relative to past years. The improvement, though, could be a “false positive.”
“...it is important to remember that the supply of fed cattle and the demand for wholesale beef determines the price of fed cattle. To increase negotiated fed cattle prices, markets need to either reduce the supply of fed cattle or increase the demand for wholesale beef. Current policies by both government and industry have focused on increasing negotiated cash transactions helping in price discovery in a given week, but unlikely affect the underlying supply and demand fundamentals in the fed cattle market. Thus, they are unlikely to increase the local cash price.” Market Insights: Response to Negotiated Cash Transactions, by Elliott Dennis, Ph.D., Assistant Professor, Livestock Marketing Economist, Department of Agricultural Economics, University of Nebraska-Lincoln, printed in Nebraska Cattlemen, December 2020.
In looking ahead last January at what 2020 might hold for Nebraska agriculture Tidbits said, “Last year (2019) was a struggle for agriculture on many fronts. Probabilities would suggest 2020 should be an improvement.” The statement turned out to be prophetic in terms of improving farm income, although the path to improvement was rather circuitous and not straight and narrow. A trade agreement with China in January promised a positive start, but the COVID-19 outbreak in March resulted in ethanol plant and meat processing shutdowns, dramatic shifts in food demand, and severe price declines. The year exited with growing exports to China, production concerns in other parts of the world, and surging prices.
Remarkably, despite the roller coaster ride that was 2020 for Nebraska farmers and ranchers, it is estimated net farm income for the state finished the year higher compared to 2019. The latest forecast of 2020 Nebraska net farm income by Dr. Brad Lubben of the UNL Department of Agricultural Economics suggests it will near $6 billion, up from $4.2 billion in 2019. If realized, it would mark the third-highest net farm income on record and the fifth consecutive year of rising farm incomes for the state. Quite a turn-around from prospects last spring. Nebraska Farm Bureau in June estimated crop and livestock receipts could plummet in 2020 by over $2 billion due to the price declines caused by COVID-19.
The state’s farmers and ranchers finished 2020 with improved or at least stable income conditions. Much of the income improvement, though, was due to increases in federal government assistance. The improvement in the aggregate, however, obscures struggles for some operations and a growing disparity between successful operations and those stressed. For the struggling operations, the government assistance and improved price conditions helped, but underlying financial weaknesses remain which must be overcome. It is these operations that will be most under pressure as 2021 begins.
Figure 3. Population of Los Angeles County vs. Other States
Source: The Van Trump Report, Kevin Van Trump, Jan. 7, 2021
“...my new favorite quote is, ‘the world is guided and directed by the stories it loves and believes in.’ Keep in mind, these can be truths, half-truths, or complete myths. As investors and business owners, it is our job not to determine what is fact or fiction but to determine and understand what ‘stories’ the world is loving and believing in...” Kevin Van Trump, The Van Trump Report, January 5, 2021.
Tidbits is putting 2020 in the rearview mirror with this edition. The next edition will be emailed January 11, 2021. 2020 has been described as “unparalleled” or “unprecedented.” Every year, though, has its unique quirks and nuances and 2021 is likely to be no different. Perhaps the best one can do is to heed the words of a French philosopher. To paraphrase, “Life’s absurd. Just enjoy it.”
Over the past few weeks Tidbits has examined Nebraska’s cow/calf and feedlot sectors. Tidbits this week delves into the stocker sector. Stocker operations (or backgrounders) serve as a regulating valve for the industry, adjusting the timing and volume of cattle flows into feedlots as the market dictates. Elliott Dennis, an agricultural economist at the University of Nebraska, describes stocker operations as, “any operation that engages in postweaning growing programs that produce commercial feeder cattle.” The sector typically takes weaned calves, adds weight, then moves them into feedlots for finishing. Stocker operations consist of cow/calf producers who retain calves, commercial stockers, or feedlots who background calves.
“Our plan…is to just pull our hair out.” This was Tina Barrett’s comment regarding the tax complications surrounding the Paycheck Protection Program (PPP) loans provided by the Small Business Administration. Barrett is the director of the Nebraska Farm Business, Inc., which assists farmers in tax planning and preparation. PPP loans were passed as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES) and were intended to help small businesses with less than 500 employees maintain payroll and cover expenses.
Figure 2. Market Value of Crop and Livestock Products, 2017
Source: USDA, Economic Research Service using data from USDA, National Agricultural Statistics Service, 2017 Census of Agriculture.
“You don’t build supply chains to spin that way in the food business—it’s not like 30% more people will suddenly join the population.” John Church, Chief Supply Chain Officer for General Mills, commenting on food supply chains and COVID, quoted by Megan McCardle, Washington Post syndicated columnist, printed in the Lincoln Journal Star, November 29, 2020.
John Newton, American Farm Bureau chief economist, wrote last week, “While farm profitability will certainly be higher in 2020, it’s a false positive.” Newton was reacting to the latest USDA Economic Research Service (ERS) estimates of U.S. net farm income for the year. The ERS projects a 43 percent increase this year, reaching nearly $120 billion, the highest since 2013 (Figure 1). In absolute dollars, the change equals a $36 billion upsurge from 2019.
A September finding of African Swine Fever (ASF) in a wild boar in Germany has caused disorder in world pork markets. The outbreak, now up to 240 cases, along with the effects on demand from COVID-19, has resulted in plummeting hog prices in Germany. Bloomberg reports hog prices in Germany at one time were down 40 percent compared to price levels in March. Germany is one of the world’s top pork exporters and ranked second in pork exports to China in 2019. In response, China, along with several other importing nations, banned pork imports from Germany.
The Kansas City Branch of the Federal Reserve Bank published its latest edition of The Nebraska Economic Databook on November 9. Compiled by Nathan Kauffman, assistant vice president and Omaha branch executive, the report provides a snapshot of jobs in Nebraska’s economy.
“The worst thing that has ever happened is not the worst thing that could happen.” Shane Parrish
Planted acres and cropping patterns in Nebraska change annually. Farmers adjust their plantings and crop mixes based on market conditions, climate, environmental factors, seed technologies, government policies, and other factors. Figure 1 plots total acres devoted to field crops in Nebraska between 1993-2020. Note the scale for the number of acres begins at 18 million to provide a better sense of the annual changes.
COVID-19 has dramatically changed consumers’ food purchases. Prior to the pandemic, more food was consumed away from home than in home. With COVID-19 and the stay-at-home orders and restrictions on restaurants, consumer purchases have shifted to food to be prepared at home.
Joe Dimaggio’s consecutive game hitting streak lasted 56 games. Cal Ripken’s consecutive games played streak lasted 2,632 games. U.S. agriculture has run a trade surplus with the rest-of-the-world for 60 years. Dimaggio’s and Ripken’s streaks eventually came to an end. Will U.S. agriculture’s streak end at 60 years?
“As people started nesting in response to the pandemic, they started undertaking all sorts of home renovation projects . . . At the same time, sawmills started shutting down and have only partially reopened because of social distancing concerns.” National Association of Home Builders chief economist Robert Dietz commenting on lumber prices increasing more than 160 percent adding about $16,000 to the cost of a new house. Van Trump Report, Kevin Van Trump, September 8, 2020.