Thursday, September 5, 2019

Farmageddon Is Real And Farmers Are Suffering

Farmageddon is real and very painful for a small segment of America. According to the Book of Revelation in the New Testament of the Bible, Armageddon is the prophesied location of a gathering of armies for a battle during the end times. Today many farmers living in America's farm belt are facing tough times with no end in sight. The trade war with China has taken a toll by bringing grain exports to a near halt.  This has caused grain prices to tumble adding to the list of blows hitting farmers. While the number of people employed on farms has declined over the decades farming remains a big business and has a huge impact on many communities. In these areas, the money flowing into local businesses as farmers sell their crops is evident in everything from truck sales to the little things common in everyday life such as dining out or getting a haircut.

Net Farm Income (click to enlarge)
The USDA's farm income forecasts are released three times a year. While little noticed by the average person living on the coast or in one of our many large cities this is a big deal. As mentioned earlier in this article farm income is not contained in a closed-loop but spills into other parts of the economy. Many areas in the heartland of America have not experienced the benefits showered upon Wall Street, because of this we should not be surprised if the gloom covering many areas of the country does not lift anytime soon. The chart to the right shows a "forecast of income" but fails to take the impact of the trade war into full consideration.

Sadly, getting support to the average working farmer is more difficult than it might seem. A recent article in AgMag claims About 9,000 "city slickers," that means, people living in luxurious neighborhoods in large cities received a farm bailout from the Trump administration's recent effort to minimize the impact of the trade war on farmers. An updated Environmental Working Group (EWG) analysis of Department of Agriculture data revealed that many recipients of the relief money live not in farm country but in large cities or other decidedly non-rural locations. These urban recipients of the bailout include members of farm families, landowners, and investors that provide land, capital, equipment for farms or make operational decisions for how a farm is run.

Modern Farming Is Capital Intense
Farm real estate debt is expected to reach $263.7 billion in 2019, a 5.1 percent annual increase. Of this real estate debt accounts for 61.8 percent of total farm debt. Due to the weakness in the prices of crops and livestock, many farmers today suffer cash flow issues and struggle to get financing to plant crops. Farmer access to capital continues to be primarily in the form of debt. Commercial banks and the FCS have become more cautious as bankruptcy filings in the Seventh Circuit (Illinois, Indiana, Wisconsin) and Eight Circuit (N Dakota to Arkansas) have hit a10-year high. Most operators try to hang on when grain prices are low, hoping to still be in business when prices increase. Efficient farmers with manageable debt levels have the flexibility to stay profitable throughout the cycle but the smaller often less efficient farmers generally feel a huge impact from a drop in income and tighter lending criteria.

Adding to the already bad situation down on the farm is the negative feedback flowing from the recent decision by the EPA to ramp up the number of waivers that it grants to the refining industry, absolving some smaller refiners of the requirement to buy ethanol. The Trump administration's shocking decision to approve 31 and deny only six 2018 waiver requests has left the bio-fuels industry reeling was incensed. The Renewable Fuels Association (IRFA) Executive Director Monte Shaw stated in a press release. “With this action, President Trump has destroyed over a billion gallons of bio-fuel demand and broken his promise to Iowa voters to protect the [Renewable Fuels Standard].”  This caused futures prices for corn-based ethanol to plunge to a five-year low for this time of year and down roughly 25 percent since June. “The Trump administration has totally annihilated the margins for ethanol producers,” Charlie Sernatinger, head of global grains futures with ED&F Man Capital Markets, told the Wall Street Journal.

The EPA’s decision is merely the latest in a series of blows from Washington and the hits keep on coming. The U.S.-China trade war has battered the U.S. Midwest, as farmers have all but lost access to the Chinese market. China has turned to Brazil for ethanol and soybeans. Prices for U.S. soybeans, corn, and other agricultural commodities have plunged. Corn prices had rebounded after the Midwest was soaked in record-breaking floods that threatened corn plantings, however, the latest data from the U.S. Department of Agriculture shows that yields are not expected to be as hard hit as previously expected. Normally this would be good news for farmers but higher-than-expected supply has sent corn prices tumbling.

Several months ago JPMorgan told clients the American agriculture complex is on the verge of disaster, with farmers caught in the crossfire of an escalating trade war. Modern farming is a capital intense business and over the years many farmers have taken on debt. They have come to count on income from grain exports to service their obligations. JPMorgan analyst Ann Duignan alerted investors that, Overall, this is a perfect storm for US farmers," Because of this, in May, Duignan downgraded John Deere's stock to underweight, pointing to the fundamentals in the farm-belt as "rapidly deteriorating."

Farm Implement Sales Have Tanked
The pain felt in the farm-belt is very evident at dozens of John Deere dealerships where the agriculture bust that has triggered massive tractor sales declines and left stores reeling. Reuters contacted dozens of John Deere Stores across the Central and Midwest U.S. in an effort to access what the trade war and adverse weather conditions have had on tractor sales this year. It reports that about a half dozen stores across the Midwest said sales in the first half of 2019 collapsed. One store, in Geneseo, Illinois, saw sales fall 50% from the previous year. Sales orders for tractors next season are down, this is an indication that farmers expect the bust will continue through 2020.

The USDA forecasts the farm sector’s risk of insolvency to be at its highest level since 2002. The value of land, the most stable asset on the farmer’s balance sheet is impacted by commodity prices, interest rates and the cyclical nature of farm income. From the farmer's point of view, Trump may have made a big mistake when he recently decided to hold off on additional tariffs on Chinese goods because it will drag out negotiations. The President's motivation seems to be keeping consumer prices in stores low over the holidays. Christmas sales make up a good share of retailers overall annual revenue. Unfortunately, his move also delayed a resolution to the trade talks by removing pressure on China to come to the table. The bottom-line is farmers can expect export sales of grain pushed back again because China views that punishing the American farmer is a chief weapon in the negotiations.

1 comment:

  1. It appears the US.and US Dollar entered into bankruptcy around 2009. QE and all related money printing is designed to pay off preferred creditors who then take the money and convert it to tangible assets (farmland) on the cheap. A observant person should be doing the same.

    ReplyDelete