|Net Farm Income (click to enlarge)
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
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 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.