44 JANUARY / FEBRUARY 2020 A Look Ahead at Ag Banking A lot happened in 2019 in agriculture. Weather was a headline for much of the year as we went from wet, to dry, to wet again in much of the United States. Trade disputes, like weather, saw improved negotiations that deteriorated, which led to improvement, and later deteriorated again. Ending stocks were down for both corn and soybeans, leading to an increase in future expectations of prices, but harvest issues in the later part of 2019 have caused issues across much of the Midwest. Farmers are hoping this rollercoaster of a ride becomes gentler heading into 2020. Despite this tumultuous year farmers have had, the U.S. Department of Agriculture projects 2019 net farm incomes to come in 5% over what they were in 2018. This will be the third consecutive year of increasing net farm income after bottoming out in 2016. Given this, you would expect a much more positive outlook for the agricultural economy. So why are most outlooks pessimistic in tone? In short, this is because the increase in net farm income was driven by a 42% increase in government payments. Without the increase in government payments, mainly from the Market Facilitation Program, net farm income would have seen a sharp drop. Despite this increase in aid, however, farm incomes have failed to reach their 19-year historical average for five consecutive years. Weak farm incomes mean less cash in farming operations, forcing agricultural producers to use their capital reserves to fund operating expenses. In short, the working capital that farmers built up during the boom has been depleted. Farmers are tapping the wealth stored in their land, rolling their operating loans to the next year to keep operations running. Farmers have also cut investments in combines, tractors and other big-ticket items. Fortunately, low interest rates have underpinned farmland prices and the balance sheet of U.S. agriculture. Although farmers responding to the CME/ Purdue Ag Barometer and the USDA Office of the Chief Economist expect farm incomes to rise moderately in coming years, both expect a long climb back for U.S. agriculture. Major news publications have chronicled the weak sentiment in U.S. agriculture. It is important to remember that today’s situation, while dire for some, has yet to plummet to the depths of the 1980s farm crisis, though bankruptcy rates for agricultural loans surpassed that of all bank loans in 2018. According to the Federal Reserve Bank of Kansas City, ag loan delinquency rates are still below the 30-year average of 2.2%, and financial ratios for U.S. agriculture remain near historical averages. As U.S. agriculture closes the year, it is time to begin thinking about the year ahead. How will the volatile forces of last year affect 2020? Weather and Crop Supplies Currently, commodity price expectations through the end of 2020 are higher than what we have seen over the past year. This can be attributed to the lower ending stocks for the major commodities. The lower stocks are due to the weather issues seen through much of the 2019 growing season. Even though the yield reductions where not as large as predicted when much of the 2019 crop was planted later than normal, the amount of acres that sat fallow was enough to lower ending stocks. Similar weather patterns in 2020 would lead to more price volatility in 2020. If weather does disrupt planting in 2020, however, we could expect prices expectations to further increase given the impact on supply. Brady Brewer, Ph.D. Assistant Professor, Agricultural Economics Purdue University brewer94@purdue.edu Jason R. Henderson, Ph.D. Senior Associate Dean and Director of Purdue Extension Purdue University jhenderson@purdue.edu AG BANKING
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