With many policy issues up in the air and a midterm election coming up Nov. 6, uncertainty is one of the only things farmers can be sure of when planning for 2019.
U.S. trade relations, the now-expired farm bill and the EPA’s review of E15 are all in play. However, the biggest factor influencing current crop prices and farmers’ decisions for next year might just be the large yields in 2018.
“The biggest thing that’s hanging out there is the large potential supplies we see out there in the field,” Iowa State University agricultural economist Chad Hart said.
“Based on USDA’s last estimate, it was record yields on both the corn and soybean crops across the nation. We are talking about incredibly large supplies hitting the marketplace again, so when you combine that with trade, that explains the vast majority of the price decline over the past six months.”
That trade uncertainty saw a little relief when NAFTA was replaced with a new trade agreement, the U.S.-Mexico-Canada Agreement or USMCA. The U.S. and Mexico reached a deal on Aug. 27, while Canada joined the fold a month later on Sept. 30 after additional negotiation.
The outlook for the ag industry didn’t change too dramatically, as the market may have factored the deal into prices before the agreement was officially reached, Hart said.
And the trade deal that is still out of reach is one with China, as disagreements have escalated into multiple rounds of tariffs, including a 25 percent duty on U.S. soybean shipments.
“Looking at China right now, the idea is that with the major trade war going on between our two countries, ag has definitely been impacted on both crop and livestock sides,” Hart said.
“The tariffs remain in place, and we aren’t seeing really any sort of positive movement anywhere in terms of negotiations to help draw this dispute to a close.”
Hart said other export markets have helped support corn, but with China being such a big player in U.S. soybean exports, there is the chance for losses this year. A USDA Foreign Agricultural Service report released Oct. 4 showed U.S. soybean outstanding sales are below last year owing to fewer sales to China, which are currently 85 percent below last season.
The Purdue University/CME Group Ag Economy Barometer fell to a reading of 114 in September, 15 points below its August reading of 129 and its lowest reading since October 2016. Producers indicated that financial conditions on many farms deteriorated significantly as 2018 unfolded and farmers’ expectations for the future weakened as well, the barometer’s authors wrote.
On the September survey, 54 percent of respondents said their farms’ financial condition was worse than a year earlier, compared to 47 percent in August and noticeably worse than the 36 percent recorded in May and 38 percent reached in June.
Asked to look ahead, 33 percent of producers in September said they expect financial conditions on their farm to be worse a year from now.
Paul Schrader, the director of agricultural banking at Kerndt Brothers Bank in Cedar Rapids, Iowa, said planning in these lower markets can come down to the small things.
“I’m not sure there’s any magic bullet,” Schrader said. “Evaluating the ROI (return on investment) on all the expense lines — and I’m not saying they need to cut some things because a lot of times those cuts can hurt on the big end when it matters.
“… Unfortunately, I don’t think there’s a huge rise in prices sitting out there. We have a lot of grain coming in, but we have to deal with what we’ve got. You are going to need to know your break-evens and take some time to do some contribution margin work going into 2019.”
With a federal aid package announced in August, some farmers will be able to recoup some of the losses they are seeing because of tariffs. However, Schrader cautioned farmers not to include that aid as part of the planning process for 2019.
“It’s going to be needed, just looking at the crop year of 2018 to make things whole or get things back a little closer to solid ground,” Schrader said.
“Going forward, I don’t know what that’s going to look like. Are they going to leave the farm program payments the same? Are there going to be adjustments?”
With those questions lingering, communication with farmers’ team of experts will be extremely important as they look ahead to next year, he said.
“Make sure you have a good set of financials and make sure you have good communication with the people on your team: the lenders, the marketers, the elevators, the suppliers,” Schrader said. “Make sure you have a good communication with those people because you are going to need it going forward.”