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Strong 2020 finish boosts potential

Strong 2020 finish boosts potential

Better commodity prices and reduced interest rates will be an important financial buffer to net farm income in 2021, with the federal government’s role in farm payments expected to greatly diminish.

The federal government was the source of more than one-third of U.S. net farm income in 2020, with the U.S. Department of Agriculture providing extraordinary payments through the Market Facilitation Program, the two Coronavirus Food Assistance programs and food purchases through the Farmers to Families Food Box program. Farmers and ranchers also qualified for Paycheck Protection Program loans through the U.S. Small Business Administration, with loans potentially being forgiven. Those irregular sources of funds to farmers and ranchers are expected to be sharply reduced – or eliminated – in a nonelection year.

But crop prices have been bolstered by Chinese robust purchases, dry growing conditions in key growing regions of the world brought on by La Niña and a weaker U.S. dollar. Those fundamentals are expected to support crop prices and farmer revenues through much of 2021. Increased feed prices, though, will pressure feeding margins for livestock, poultry, and dairy and producers. And persistently dry weather in the U.S. Great Plains will curb farmer crop yields.

Historically small interest rates, meanwhile, will decrease borrowing costs for farmers and ranchers. Fixed interest rates for farm operating loans typically follow closely with trends in the Federal Reserve’s overnight lending rate. While farmers benefit from improved commodity prices and reduced interest expense, agricultural lenders may see improved repayment capacity and reduced rates of nonperforming agricultural loans in regions not severely impacted by drought. The Kansas City Federal Reserve’s recent survey of agricultural lenders found that 25 percent of bankers in the district reported loan demand was less year-over-year, while the average share of farm loans monitored for potential problems or exhibiting weaknesses reached the smallest level in five years.

The value of farmland, which is an important source of equity for farmers and ranchers, is also expected to remain stable in 2021. It will be supported by reduced interest rates that encourage farmers, ranchers and outside investors to purchase land despite the illiquidity of the market.

The improved financial position of farmers heading into 2021 also portends an increase of cash rents on farmland in some regions, making land a more-attractive investment compared to other safe assets like 10-year treasuries offering yields of less than 1 percent. Agricultural producers will also upgrade machinery lines after years of trading down for used machinery during periods of reduced net farm income.

But with land and machinery costs potentially increasing, farmers and ranchers risk elevating enterprise cost structure and risking profitability long-term as commodity prices invariably soften.

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Tanner Ehmke is manager of CoBank’s Knowledge Exchange.

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