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  • Inflation Control, Farm Interest Rates, and Farmland Values

    Inflation Control, Farm Interest Rates, and Farmland Values

    In March of this year, inflationary pressures alarmed the U.S. economy as the consumer price index increased by 8.5 percent, the highest increment in the last 41 years.  The Federal Open Market Committee (FOMC) promptly adjusted the federal funds rate (FFR), its main policy tool for regulating inflation. Among other effects, a higher FFR triggers increases in short- and medium-term lending rates (with indirect influence on long-term rates).  Rising interest rates consequently serve as disincentives for borrowing. When loan volumes decrease, the money supply circulating in the economy is controlled, thus eventually lowering inflation.

    How do these FOMC decisions affect farm lending?  Based on available farm lending rates from the 10thFederal Reserve District, average variable farm interest rates for the 1st quarter of 2022 for short- and long-term loans were 4.93 and 4.56 percent, respectively.  These levels are expected to go up with further FFR hikes projected this year.  However, current interest rates are still below the most recent highs (6.50 and 5.89 percent, respectively) registered when FFR was at its post-recession peak (2018) of 2.5 percent (Figure 1).  Shortly before the onset of the Late 2000s Great Recession (in the last two quarters of 2016), short- and long-term farm interest rates were even higher, reaching 9.15 and 8.36 percent, respectively. 

    Figure 1:  Average Quarterly Variable Farm Interest Rates for Short- and Long-Term Loans, 10th Federal Reserve District, 2002 (2nd Quarter) to 2022 (1st Quarter)

    Source: FRB Kansas Agricultural Credit Survey

    How would the farm lending sector fare under these conditions?  Several studies establish the farm sector’s resilience and ability to maintain good credit standing even during periods of economic adversity.  During both the late 2000s recession and the current pandemic conditions, loan delinquency rates among farm borrowers were significantly lower than their non-farm borrowing peers.  Moreover, the surge of banking failures in 2007-2009 only included a negligible fraction of agricultural banks.  This year, as the economy deals with new challenges, farm lenders already have expressed their confidence in the farm sector’s ability to withstand evolving economic concerns.  After all, its latest balance sheet credentials are strong. 

    Trends in the valuation of farmland, the major asset in the farm balance sheet, have usually been regarded as a critical barometer of the sector’s financial health.  Latest national estimates from the National Agricultural Statistics Service (NASS) reported in August 2021 indicate a 7 percent increase in farm real estate values compared to August 2020 levels, with cropland values registering larger increases (7.8 percent) than pasture values (5.7 percent).    Notably, average 2021 farmland values in all states in the Southern region increased over their 2020 levels, with the growth in the Southern Plains exceeding the national rate at 9 percent, while the Southeast, Appalachian, and Delta states registered annual increments of 2.7, 2.4, and 1.6 percent, respectively (Figure 2).

    Figure 2:  Average Farm Real Estate Values per Acre, U.S. and Southern Regions, 2017-2021

    Source:  USDA, National Agricultural Statistics Service

    More recent, survey data for the 1st quarter of 2022 from two Federal Reserve Districts – Seventh (Iowa, and most of Illinois, Indiana, Michigan and Wisconsin) and Tenth (Colorado, Kansas, Nebraska, Oklahoma, Wyoming, northern New Mexico, and Western Missouri) – reflect a sustained acceleration trend in farmland values at even more substantial year-over-year gains of more than 20 percent.

    As inflationary and economic growth concerns persist, the farm economic outlook may be tempered by the effect of rising input prices on farm incomes; consequently, slowing down and limiting future farmland valuation gains.  Nonetheless, lenders expect the farm sector to hold its ground, given some liquidity cushion accumulated over sustained growth in recent periods.  Hopefully the sector will continue to uphold its usual prudent borrowing behavior, making borrowing decisions that are practical, cautious, and not necessarily driven by the credit limits commanded by appreciated collateral property – much like what caused the 1980s farm financial crises.

    Escalante, Cesar L. . “Inflation Control, Farm Interest Rates, and Farmland Values“. Southern Ag Today 2(25.3). June 15, 2022. Permalink

  • Pork and Beef International Trade

    Pork and Beef International Trade

    The latest estimates for meat trade were released last week by USDA FAS and ERS. These monthly estimates include export and import data for beef, pork, and other meats during April. We’ll focus on pork and beef in this article and the different trends of each sector.  

    Pork exports were down nearly 20 percent both during April and year-to-date as compared to 2021. Declines in shipments to China are the biggest driver as U.S. pork exports to China are about 70 percent lower, so far in 2022, compared to 2021. Exports totaled 529 million pounds during April. Mexico and Japan were the largest volume destinations for U.S. pork and accounted for more than half of total pork exports.

    Beef exports during April were up about 6 percent above April 2021 and totaled 304 million pounds for the month. Japan, South Korea, and China were again the largest volume destinations for U.S. beef during April and were each up about 8 percent compared to last year. Year-to-date, beef exports to China (up 43 percent) and Taiwan (up 44 percent) make up the largest increases compared to 2021. Beef exports to Mexico were about 24 percent lower during the first 4 months of 2022 as compared to 2021. 


    On the import side, both pork and beef imports were higher than a year ago. Pork imports were up 49 percent in April and beef imports were 7 percent. On the beef side, imports from Mexico (up 19 percent) and Brazil (up 51 percent) showed the largest increases from a year ago. Pork imports from Canada are the primary contributor to the increase and made up more than half of the pork imports during April. 

    Maples, Josh. “Pork and Beef International Trade“. Southern Ag Today 2(25.2). June 14, 2022. Permalink

  • World Per Capita Grain Consumption and Global Economic Growth

    World Per Capita Grain Consumption and Global Economic Growth

    Since the early 2000’s, global economic growth has been driven by emerging market and developing economies (Figure 1). Since 2000, the average annual increase in Gross Domestic Product (GDP) from this group of nations has been five percent, compared to just under two percent for advanced economies.  The “altered economic landscape” of the 21st century that drove this growth includes technical change (the internet, and access to it), lower transportation and communication costs, reductions in tariff rates and other barriers to trade, in general, lower costs of international trade.  This transformation reduced poverty and improved living standards across much of the globe (Krueger, 2006).  

    Figure 1. Global Economic Growth, Annual Percentage Change, GDP, 1980-2022, 2023-2027 projected

    Average incomes in the largest economies within the category of ‘Emerging market and developing economies’—Brazil, Russia, India, China, Mexico, Indonesia, Vietnam, Philippines, Thailand, Malaysia, a group that accounts for half of the world’s population—started to rise rapidly in 2003 (Figure 2) (IMF, 2022).  Measured in current $US, the average income in these ten countries (weighted by population) from 1980 to 2002 increased from $433 to $1,232, about $35 per year.  Incomes grew from $1,356 in 2003 to $6,319 in 2020, about $275 per year.  

    Figure 2. Emerging Economies Gross National Income Per Capita and World Per Capita Grain Use

    World Bank. DataBank. Accessed June 8, 2022 and available online at https://databank.worldbank.org/home.aspx.

    This economic activity has had a direct impact on grain markets. While world grain consumption (barley, corn, millet, mixed grains, oats, rice, rye, sorghum, and wheat) increased steadily from 1980 to 2002, per capita grain consumption was flat to trending lower from 1980 to 2002.  Beginning in the 2003/2004 marketing year, per capita consumption began to increase along with incomes in emerging economies, from 312 kg per person to 364 kg per person in 2021/22, an increase of 17 percent. As incomes grew in emerging economies, so did the demand for grain—for food, feed, and fuel—in the subsequent marketing years. For comparison, per capita grain use in the rest of the world (all countries other than emerging economies) increased seven percent from 2003/04 to 2021/22. Measuring consumption on a per capita basis accounts for overall population growth experienced in these emerging economies over this time span. 

    Since 2003, there have been five marketing years in which a decline in production has been associated with a drop in per capita use: 2006/2007, 2012/2013, 2015/2016, 2017/2018, and projections for the new marketing year, 2022/2023 (Table 1).  In 2012/13 and 2015/16, the setback in grain use was short lived, in that after a one-year decrease, consumption increased to a new, higher level in the year following.  That increase in use coincided with increased production and a continued rise in average incomes.   

    Table 1. World Grain Production* and Per Capita Grain Use

    Marketing YearWorld Grain ProductionmmtProduction Change mmtPer Capita Grain UseKg/personUse Change
    2003/20041,86643 312 1.97 
    2004/20052,044178 315 3.43 
    2005/20062,017(27)317 2.02 
    2006/20072,005(12)316 (0.71)
    2007/20082,132127 322 5.46 
    2008/20092,252120 327 5.48 
    2009/20102,2531 330 2.78 
    2010/20112,213(40)330 0.15 
    2011/20122,344130 339 9.02 
    2012/20132,296(48)329 (10.71)
    2013/20142,512217 343 14.41 
    2014/20152,56048 346 3.25 
    2015/20162,518(42)341 (4.80)
    2016/20172,668150 358 16.39 
    2017/20182,619(49)354 (4.25)
    2018/20192,63213 355 1.98 
    2019/20202,68048 356 0.44 
    2020/20212,72444 361 5.03 
    2021/20222,79469 364 3.06 
    2022/2023p2,765(28)360 (4.32)
    *Barley, corn, millet, mixed grain, oats, rice, rye, sorghum, and wheat
    Source: USDA, FAS PSD

    Due to mostly geopolitical events, the 2022/2023 marketing year for grains is shaping up as a short crop year.  Inflation, rising interest rates, and lingering pandemic impacts are among the factors limiting economic growth prospects in the near term. Among the factors that will determine whether we extend the recent trend in world per capita grain use are future crop production levels and global economic conditions.  The combination of a short-crop and a slowdown in income growth can impact per capita grain use beyond the current marketing year.  

    References:

    Krueger, Anne O. “The World Economy at the Start of the 21st Century”, International Monetary Fund, Annual Gilbert Lecture, Rochester University, New York, April 6, 2006. Accessed May 31, 2022 and available online at https://www.imf.org/en/News/Articles/2015/09/28/04/53/sp040606.

    International Monetary Fund (IMF). IMF Datamapper. Accessed May 31, 2022 and available online at https://www.imf.org/external/datamapper/NGDP_RPCH@WEO/OEMDC/ADVEC/WEOWORLD.

    USDA, Foreign Agricultural Service. Production, Supply and Distribution (PSD). Accessed June 8, 2022 and available online at https://apps.fas.usda.gov/psdonline/app/index.html#/app/home.

    World Bank. DataBank. Accessed June 8, 2022 and available online at https://databank.worldbank.org/home.aspx.

    Welch, J. Mark. “World Per Capita Grain Consumption and Global Economic Growth“. Southern Ag Today 2(25.1). June 13, 2022. Permalink

  • Fence Laws for Rural Landowners

    Fence Laws for Rural Landowners

    Questions regarding fence disputes are a regular inquiry at the National Agricultural Law Center.  For such a common issue, one would assume that this area of the law is relatively straightforward, but that is not always the case!   All fifty states have passed laws relating to fences and livestock running at large, but there are significant differences between the states and sometimes even within the same state.  For example, Texas is an “open range” state which means that livestock owners are not required to fence in their livestock; however, counties can, and have, adopted local stock laws that effectively close the range in those counties.  It can be very difficult to determine whether a Texas county has adopted a local stock law closing the open range in that county because older records are often hard to find and may not be found online. 

    The confusing nature of fence laws causes numerous problems across the country, but a few general rules apply to most of the southern states.  If you have livestock, you typically have a duty to keep them on your property (except for some counties in Texas.)  What constitutes a legal fence is typically found in your state law, but the fence must be sufficient to keep your livestock on your own property.  The last area where significant questions arise covers maintaining and paying for the boundary fences between neighbors.  Once again, this area of the law is highly dependent on where your property is located.  It is dependent on the state, but some states have antiquated fence laws which further complicates the problem.  To read your state fence law, click here.  

    If you do have a fence issue with your neighbor, the cheapest way for both parties to resolve the dispute is to come to an agreement that everyone can accept.  Fences are not cheap, but lawsuits will typically cost more in the long run.  

    Source – the National Agricultural Law Center

    Rumley, Rusty. “Fence Laws for Rural Landowners“. Southern Ag Today 2(24.5). June 10, 2022. Permalink

  • While Still Largely Profitable…Crop Producers Putting Historic Amount of Capital at Risk in 2022

    While Still Largely Profitable…Crop Producers Putting Historic Amount of Capital at Risk in 2022

    This morning I testified before the U.S. House Agriculture Committee Subcommittee on General Farm Commodities and Risk Management at a hearing titled “A 2022 Review of the Farm Bill:  Economic Perspectives in Title I Commodities and Title XI Crop Insurance”.

    At the Agricultural and Food Policy Center (AFPC) at Texas A&M University, our work with 675 commercial producers located across the United States has provided our group with a unique perspective on agricultural policy.  Currently, we maintain the information to describe and simulate 94 representative crop and livestock operations in 30 states. 

             In order to provide perspective on Titles I and XI, I wanted to briefly summarize a recent AFPC report that looks at farm profitability in 2022 relative to 2021 for our 64 representative crop farms in the face of higher input and output prices[1].  For this report, we asked our panel members to provide their costs per acre for 2022 versus 2021 for the major input categories.  The average for each category across all respondents is presented in Table 1.  Updated commodity prices for the 2021/22 and 2022/23 marketing years and policy variables were obtained from the FAPRI-MU Bulletin #01-22 entitled U.S. Agricultural Market Snapshot, April 2022 (Table 2).  While some producers were able to benefit by locking in input prices early in 2021 for this year’s crop, most indicated very little ability to lock in these prices even when using their normal tax management strategy of prepaying inputs.  Simply, the input suppliers would not lock in a price until the producers agreed to take delivery.  Almost every respondent stated they were going to do their best to reduce input usage in the face of the highest costs of production they had ever experienced. 

    Table 1.  Average Percentage Change in Representative Farm Input Costs/Acre from 2021 to 2022.

     SeedNitrogen FertilizerPhosphorus & Potassium FertilizerHerbicideInsecticideFungicideFuel & Lube
    Percentage Change
    2021 to 2022    		16.58%133.62%92.75%64.23%40.25%36.02%86.63%

    Table 2.  Projected Commodity Prices Reported in FAPRI April 2022 Update, Marketing Years 2021/22 and 2022/23.

     2021/222022/23Percentage Change
    Corn ($/bu)$5.78$6.064.84%
    Wheat ($/bu)$7.60$8.086.32%
    Soybean ($/bu)$13.27$14.227.16%
    Grain Sorghum ($/bu)$5.87$6.144.60%
    Barley ($/bu)$5.27$5.606.26%
    Oats ($/bu)$4.30$4.00-6.98%
    Upland Cotton ($/lb)$0.910$0.871-4.29%
    Seed Cotton ($/lb)$0.464$0.443-4.53%
    Peanuts ($/lb)$0.238$0.2400.84%
    Sunflower Seed ($/lb)$0.318$0.3241.89%
    Canola ($/lb)$0.318$0.295-7.23%
    All Rice ($/cwt)$15.80$15.840.25%
    Long Grain Rice ($/cwt)$13.75$14.032.04%

             The news is full of stories about inflation that is averaging 8.5 percent so far this year for the average American.  The lowest year-over-year inflation farmers are seeing is twice that on seed with most categories many times higher. Commodity prices, while generally higher in 2022, are up less than 8 percent.  If not for the incredible productivity of the U.S. farmer, there would be a major financial crisis in agriculture.  Following are the key highlights of our report:

    • Net cash farm income in 2021 included a significant amount of ad hoc assistance. Absent another infusion of assistance in 2022, we estimate that significant increases in input prices will result in a huge decline in net cash farm income in 2022 (compared to 2021).
    • Despite the significant reduction from 2021, higher commodity prices for most crops will likely still result in positive net cash farm income for most of AFPC’s representative crop farms. The noticeable outlier is rice – two-thirds of the rice farms are facing losses in 2022.
    • The analysis hinges on producers receiving the higher commodity prices forecasted by FAPRI with average yields. With drought being experienced across a significant portion of the country and many other areas facing excess moisture, this assumption may be overly optimistic. 
    • Having worked with farmers located across the U.S over the last 30 years, I want to make sure you understand we are talking about historic amounts of capital that farmers are putting at risk

    Throughout my career, I have referred to the programs in Title I and Title XI as the three-legged stool that serves as the safety net for U.S. producers.  The current programs, agriculture risk coverage (ARC) and price loss coverage (PLC) and the nonrecourse commodity loan program, serve as two of the legs while the federal crop insurance program serves as the third leg. The following are what I believe to be the most significant shortcomings of all three legs of the stool.  Most of my suggestions require additional resources that may be difficult to secure but are necessary.

    • Price loss coverage (PLC) reference prices worked fine while inflation was fairly low; however, the reference prices set in the 2014 Farm Bill and continued in the 2018 Farm Bill are in dire need of increases to remain relevant.  Producers’ costs have increased substantially, and the current reference prices are not providing a relevant amount of protection.  

    Agriculture risk coverage (ARC) was also established in the 2014 Farm Bill as a second attempt at providing producers a revenue-based safety net program to replace the overly complicated and not widely used average crop revenue election (ACRE) program first used in the 2008 Farm Bill.  While good when coming off of relatively high prices, ARC proved worthless when prices declined and remained relatively flat, providing little protection to producers.  This is why that while widely chosen over PLC early in the 2014 Farm Bill, ARC was largely abandoned as a choice of safety net program in recent years.  Since ARC has the reference price embedded in the calculations, raising reference prices will make ARC more attractive as a revenue protection safety net alternative.

    Assuming these two alternatives are used going forward, instead of forcing producers to pick the tool (ARC or PLC) they want, I would suggest allowing them to receive the benefits of whichever is higher in a given year.  This would cost nothing more than if the producers have chosen wisely and selected the appropriate tool and would take a major decision away that only serves as a major distraction to their work in trying to grow a crop.  

    • The nonrecourse marketing loan program works as it was designed more than four decades ago; however, despite modest increases for some commodities in the 2018 Farm Bill, the rates have largely remained unchanged over the past 30 years, losing ground to inflation.  Providing producers the ability to take out a storage loan or receive a loan deficiency payment on a crop is a very useful marketing tool.  The rates need to be raised to increase the amount of the crop that is being protected which will cost money but is significantly less expensive to do at current price levels.
    • Federal crop insurance is an enormously successful public-private partnership that today stands as the primary safety net tool for U.S. producers.  This is due to the program largely using futures prices to annually adjust the amount of protection producers can select.  While crop insurance is popular with producers, the little-known secret in the farming community is that bankers “encourage” producers to purchase buy-up levels of crop insurance as a means of protecting the producer and the operating loan banks make to producers.  As I have said many times in front of Congress… do no harm to crop insurance and stop outside interest groups from tying provisions of their pet projects to crop insurance – for example, linking climate change practice adoption to insurance program subsidy levels.  This runs the risk of creating an unlevel playing field for producers by distorting protection levels and leaving some producers with less protection due to their lack of feasible climate change mitigation alternatives.  

             While this morning’s hearing focused on Title 1 and crop insurance, I believe the upcoming farm bill provides a clear opportunity to help address some of the shortcomings ad hoc assistance was designed to address as well. In the case of WHIP, WHIP+, and ERP, they all essentially are designed to help cover the large deductibles producers face in their crop insurance policies.  While the ad hoc assistance over the last 5 years has been vital, it comes LONG after the disaster has come and gone and has been limited to specific causes of loss.  Perhaps most important, ad hoc assistance is, by definition, not guaranteed.  Farmers already face enough risks and uncertainty – ideally, they wouldn’t have to guess at what the safety net might look like as they struggle to put a crop in the ground.

    Link to Full Testimony

    [1] Economic Impact of Higher Crop and Input Prices on AFPC’s Representative Crop Farms, AFPC Briefing Report 22-05.  https://www.afpc.tamu.edu/research/publications/files/716/BP-22-06.pdf

    Outlaw, Joe. “While Still Largely Profitable…Crop Producers Putting Historic Amount of Capital at Risk in 2022“. Southern Ag Today 2(24.4). June 9, 2022. Permalink