U.S. farm economy improving, but challenges remain

I recently attended the USDA Agricultural Outlook Forum in Washington DC. With the backdrop of a weakening U.S. farm economy, U.S. farmers and policy makers have some challenging decisions to navigate through in 2017.

Highlights from the conference are:

The importance of the next Farm Bill

Mike Conaway, chair of the U.S. House Agriculture Committee, highlighted the top three priorities of the next Farm Bill which are adjusting policies for:

  1. Dairy
  2. Cotton
  3. Land conservation

The current Farm Bill introduced net revenue insurance for dairy producers by establishing a floor for profit margins. The new farm bill should “tweak” the current program to offer increased benefits and a bigger return for the contributions dairy producers make to the program. High corn and soybean prices of the past brought land back into production which increased U.S. supplies. Adjustments to the policy would aim to increase the amount of wetland and marginal lands out of production with the added benefit of reducing U.S. crop production.

Declining farm revenue impacting agribusiness

Luke Chandler, John Deere’s Deputy Chief Economist, shared insights about the impacts of the decline in U.S. net farm income on equipment sales. Between 2013 and 2016, John Deere’s net sales declined 34% in Canada and the U.S., and Asia-Pacific was the only region where sales were flat. Despite the current challenges, he noted his optimism as improving world GDP, population growth, urbanization are all driving up world food demand and the need to raise production.

Beef and pork production to increases despite potential caution signs

John S. Nalivka, President of Sterling Marketing Inc., shared insights on packer utilization and available meat supplies, and potential impacts on cattle and hog markets. Currently, average U.S. hog slaughter utilization is at 98% of capacity, and forecast to be 95% in 2017 as production at new facilities start to be running full speed. This will support the projected increase in U.S. hog inventories of 1.5% in 2017. Hog slaughter capacity is forecast to increase roughly 10% by the end of 2018.

Average beef slaughter utilization is around 93% of capacity, and is projected to decline to 90% in 2017 as a new U.S. plant comes on line in May 2017. Larger slaughter capacity is good news for producers as the U.S. cattle herd size is also building. Per capita supplies of red meat and poultry have increased 6% since 2014 and are expected to increase another 2% in 2017. Increased supplies will put downward pressure on retail prices unless new export markets can be found.

Corn and soybean revenues remain under pressure

Dan Basse, President of AgResource Company, presented his views of the corn and soybean markets for 2017. Forecasts suggest that soybeans will be profitable, the first time since 2014. Corn net revenues are however forecast negative, and adjustments in expenses are required. The top four cost components for corn are:

  1. Land representing 33.3% of total costs
  2. Seed (13.2%)
  3. Nitrogen (13.0%)
  4. Harvest machinery (11.9%)

Based on these assumptions, it would be expected that downward pressures will remain in the U.S. farmland market in 2017. Our blog will feature the 2017 outlook for Canadian agriculture next week.