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Understanding the Growing U.S. Agricultural Trade Deficit: The Fall in Exports

The recent (May 2024) trade outlook report published by the Economic Research Service and Foreign Agricultural Service – agencies of the U.S. Department of Agriculture (USDA) – is projecting the highest agricultural trade deficit on record for fiscal year (FY) 2024 (October – September). The FY2024 forecast have U.S. agricultural exports at $170.5 billion, unchanged from the February forecasts, but imports at $202.5 billion, up from the previous forecast of $201.0 billion. If these projections hold true, the resulting trade deficit would be a record $32 billion. To put this in context, U.S. agricultural exports have far exceeded imports in past years. It is only in recent years that U.S. agricultural trade became more balanced. FY2023 was the first year the U.S. experience a significant agricultural trade deficit ($16.7 billion), which is half the projected deficit for FY2024 (Kaufman et al., 2024). Given concerns about the rising trade deficit in U.S. agricultural trade, we plan to discuss this issue in a series of articles focused on explaining recent export declines, rising imports, and the status of U.S. agricultural trade based on the most recent data in 2024. In this article, we explore the export side of the rising trade deficit.

Figure 1 shows U.S. agricultural exports in quantity terms and the unit value (reflecting average prices) from 2010 – 2023. Note that exports, measured in million metric tons (MMT), reached a record high of 230 MMT in 2021. The unit-value in 2021 was $769/MT, resulting in a total value of $177 billion. While exports decreased the following year to around 216 MMT, prices increased significantly that year resulting in record exports in value terms ($196 billion in 2022). Prices, on average, remained relatively steady in 2023, but there was a significant volume decline in 2023 to 190 MMT. The figure shows that exports volume has been trending downward for the last three years. While U.S. agricultural export volumes decreased by 17.5% from 2021 to 2023, total export value only fell by 1.4% over the same period due to significant higher prices in 2022 and 2023 (USDA, 2024).

What is the reason for the decline in exports since peaking in 2021? Table 1 shows the percentage change in U.S. agricultural export volumes between 2021 and 2023 by major destination country or region. China was our leading agricultural export market in 2021, accounting for 26.4% of the total export volume that year. The next highest country, Mexico, only accounted for 17.4%. During the period 2021-2023, U.S. agricultural exports to China decreased by 30.9%. Other noted declines include exports to Southeast Asia/ASEAN (‑14.2%), Japan (‑26.6%), South Korea (‑34.6%), Taiwan (‑17.9%), and Guatemala (‑22.2%).

As far as product, U.S. corn exports to China fell 70% in 2023 when compared to 2021, down from record export levels. Exports of other coarse grains were down 34% and wheat was down 57% during this period. U.S. ethanol exports to China were down nearly 100% in 2023 when compared to 2021 (USDA, 2024). Although exports were also down in other countries (e.g., U.S. corn exports down by 72% in South Korea), declining exports to China explain the major share of the overall decline in U.S. agricultural exports in recent years.

Figure 1. U.S. Agricultural Export Volume and Unit-Value: 2010-2023

Source: U.S. Department of Agriculture (USDA, 2024).

Table 1. Percentage Change in U.S. Agricultural Export Volumes by Major Destination Market

	% Change 2021-2023
World Total	-17.5%
China	-30.9%
Mexico	1.0%
ASEAN	-14.2%
Japan	-26.6%
Canada	-6.3%
EU-27	25.0%
Colombia	0.1%
South Korea	-34.6%
Taiwan	-17.9%
Guatemala	-22.2%
Source: U.S. Department of Agriculture (USDA, 2024).

For more information

Kaufman, James, Hui Jiang, Bart Kenner, Angelica Williams, and Adam Gerval. (2024). Outlook for U.S. Agricultural Trade: May 2024. Report AES-128. U.S. Department of Agriculture. https://www.ers.usda.gov/publications/pub-details/?pubid=109252

U.S. Department of Agriculture (USDA). 2024. Global Agricultural Trade System (GATS). Foreign Agricultural Service. https://apps.fas.usda.gov/gats/default.aspx

Muhammad, Andrew, and Md Deluair Hossen. “Understanding the Growing U.S. Agricultural Trade Deficit: The Fall in Exports.” Southern Ag Today 4(26.4). June 27, 2024. Permalink

June 27, 2024

Liquidity and Working Capital a Priority

Agricultural lenders listed liquidity and working capital as their top concern for producers this crop year, according to a survey conducted by the American Bankers Association and Farmer Mac last August. This is likely an indicator that lenders are seeing the outlook for lower commodity prices while at the same time retaining elevated input costs, including interest rates on operating notes. Because of the nature of agriculture, where there are months when cash outflows exceed inflows during the growing season, liquidity and working capital should be a priority every year, regardless of market outlook.

Liquidity is a producer’s ability to meet their cash financial obligations as they become due. Working capital is a measure of liquidity that measures how much current assets exceed current liabilities.

Current assets and current liabilities are found on the balance sheet. Current assets include cash and other assets that can be converted to cash relatively quickly, while current liabilities include any debts that are due within a year or less. Some examples of current assets include cash, inventories of crops, market livestock, livestock products and supplies, accounts receivables, prepaid expenses, marketable stocks and bonds, and the cash value of life insurance. All of these can be quickly converted to cash to pay any debts that come due. Current liabilities are debts or obligations that must be paid within a year’s time or less, including accounts payable to merchants and suppliers, current notes payable and the current payments required on long-term notes payable to lending institutions.

Liquidity, by definition, is related to cash flow. In agriculture, a pro forma cash flow statement is a great tool to estimate cash flows and working capital balances for the upcoming crop year, providing an idea of the approximate timing and size of inflows and outflows. Of course, it is difficult to truly predict the future. As a result, producers need to have an appropriate amount of working capital on hand to provide flexibility in meeting uncertain cash flows.

An example of this occurred during the planting season this year. The weather was unusually wet in some areas this past month, leading to saturated soils that caused seedling damage. Some producers had to make the decision to replant some of their fields. Those who had the working capital available were able to afford this unexpected cash outflow. Liquid reserves, by means of working capital, are necessary for the sustainable operation of the farm business every year.

Sources/Resources:

Fall 2023 Agricultural Lender Survey Results. (Nov 6, 2023). The American Bankers Association and Farmer Mac survey conducted August 2023. https://www.aba.com/-/media/documents/reference-and-guides/2023-ag-lending-survey-report.pdf Obtained online Jun 10, 2024.

Smith, Amanda R. “Liquidity and Working Capital a Priority.” Southern Ag Today 4(26.3). June 26, 2024. Permalink

June 26, 2024
The Relative Value of Bred Cows

Many analysts expect the beef cattle industry to expand the cowherd in 2025. This won’t be confirmed until the release of the January 2026 Cattle Inventory Report. When herd expansion begins, replacement heifers and bred cows will become increasingly valuable. As one might expect, replacement heifer and bred cow prices are correlated with feeder cattle prices.

Cows that are open but otherwise healthy can enter two marketing channels: cull cow or bred cow markets. In most circumstances, cows leaving a cow-calf operation are sold as open cull cows. However, cyclical cattle inventories and supply dynamics provide scenarios where the value of bred cows dominates the value of open cull cows because of herd expansion.

The orange line in the figure is the price of a Breaking 75-80% cull cow sold in Joplin, MO. Breaker cows correlated approximately to a cow with a body condition score of 7-8. So, a cow that is open but in good condition. The green line in the figure is the price of a cow that is 4-9 months bred and sold in Joplin, MO. The blue line is the price of a bred cow compared to that of a cull cow. A price ratio that is less than one indicates that a cow is worth more as an open cull cow. A price ratio greater than one indicates that bred cow value dominates cull cow value. An increase in the price ratio implies that bred cow prices have increased faster than cull cow prices. This increase in the ratio is a function of where the industry finds itself in the cattle cycle.

Mitchell, James. “The Relative Value of Bred Cows.” Southern Ag Today 4(26.2). June 25, 2024. Permalink

June 25, 2024
Current Farm Bill Negotiations for the Marketing Assistance Loan Program

The Nonrecourse Marketing Assistance Loan Program (MAL) is a marketing tool available for select commodities.  Authorized through Title I of the farm bill, MALs provide cash to producers at harvest to allow storage and marketing of the crop for a nine-month period following harvest.  Producers repay the MAL (with interest) or forfeit the crop that was pledged as collateral to the Commodity Credit Corporation (CCC).  MAL rates are defined in the farm bill for each eligible commodity and are thus a point of negotiation in farm bill debates.

On May 1, 2024, the Senate Majority released their farm bill position, which details an escalator based on the percentage increase in cost of production compared to the previous five years, as estimated by the USDA Economic Research Service (ERS).  There is a cap in the Senate Majority position of a 10% increase over the 2018 Farm Bill loan rates.

The House Committee on Agriculture then proposed new loan rates that are predominately 10% higher than the existing loan rates for the major crops listed in Table 1.  This proposal passed out of Committee on May 24, 2024.  Details of the two farm bill positions can be found in the May 24, 2024 Southern Ag Today article.

The purpose of this article is to explore the differences between the Senate Majority position and the House Ag Committee bill, as well as to illustrate the degree to which the MAL can be used as a marketing tool to cover operating costs of production.  Table 1 shows the ERS cost of production estimates, FAPRI projected commodity prices, the current loan rate, and the proposed Senate and House MAL rates.  The “percentage increase in operating cost” compares the 2024 estimate to the five-year average 2019-2023 operating costs.  In all crops listed there is at least a 10% increase in operating costs compared to the previous five-year average, with rice operating costs estimated at a 16.7% increase.  Therefore, the Senate position would trigger the 10% cap on the increase in MAL rates.  This means that both the Senate position and House committee bill would result in the same loan rate at the present time for all but peanuts and cotton.  There is an additional $0.50/ton in the Senate position for peanuts compared to the House bill.  The calculation of the upland cotton loan rate is more complicated than illustrated in the Senate summary document.  The 2018 Farm Bill specifies a range of $0.45-$0.52/lb for the loan rate.  At a 10% increase, that would result in the Senate position of $0.50-$0.57/lb.  The House bill specifies $0.55/lb, thus being higher or lower than the Senate position, depending on how it is implemented.    Furthermore, the Senate position would require an annual calculation for all loan rates and then an adjustment based on the current 2018 Farm Bill loan rates.

The other question is the degree to which the MAL can be used as a marketing tool to provide short term funding compared to the operating cost of production for these crops.  Table 2 shows the ratio of the 2018 loan rate to the 2018 operating cost per unit.  For all but sorghum and upland cotton, the ratio was greater than 1.0, indicating coverage greater than 100% of the operating cost of production at the time the 2018 Farm Bill was written.  The Senate proposal at the 10% loan rate increase and the House bill produce the same ratios for all but upland cotton.  In both of these bills, there is a decrease in the ratio of the loan rate to the operating cost per unit for all crops other than barley and upland cotton.  In fact, corn, oats, rice, sorghum, and upland cotton all have a ratio below 1, indicating loan amounts less than 100% of the operating cost of production.  Farmers who use this marketing tool should consider this relationship to better understand how much of their operating costs can expected to be covered at harvest by this program.

References

Fischer, Bart. 2024. Battlelines Are Being Drawn: Comparing Current Farm Policy Proposals.  Available at: https://southernagtoday.org/2024/05/24/battlelines-are-being-drawn-comparing-current-farm-policy-proposals/

Rabinowitz, Adam. “Current Farm Bill Negotiations for the Marketing Assistance Loan Program.” Southern Ag Today 4(26.1). June 24, 2024. Permalink

June 24, 2024
Animal Ag in the “Farm, Food and National Security Act of 2024”

The Farm Bill proposal by Rep. Glenn “G,T.” Thompson has made it through the initial markup and passed through the House Agricultural Committee. While there is still a long road between now and what is ultimately enacted, there are a few provisions in the proposed bill of particular interest to folks in animal agriculture.

One proposed provision would prohibit states from setting conditions for sale on products derived from “covered livestock” that are different than those imposed by the state where the animal was raised.  As a reminder, the US Supreme Court recently ruled that states do have the ability to set sales restrictions, allowing California to enforce Proposition 12.  If this proposal is enacted, it would prohibit California (and Massachusetts) from enforcing their current sales restrictions.  Additionally, it would prevent other states (such as New York, which is considering a similar bill), from enforcing any in the future.  Note, however, that the definition of “covered livestock” in the farm bill proposal specifically excludes laying hens.  In other words, the provisions of Prop 12 covering pork and veal products would not be enforceable, but the provisions requiring cage free egg production would be.  Similarly, other states that have passed or are considering laws requiring specified types of production methods for egg laying hens could still enforce those requirements.

Another proposed provision would create a pilot program allowing some custom exempt facilities to sell meat products directly to consumers.  “Custom exempt” does not require continuous inspection by a FSIS or state inspector during the slaughter process.  Currently, “custom exempt” meat cannot be sold, and is instead only available for consumption by the owner of the living animal.  More information on that here.  The proposal would allow participating custom exempt plants or customers who have animals processed at a custom exempt plant to sell the meat to the public, conditioned on the meat not being re-sold past the original buyer.  This pilot program would operate until 2029.

The Farm Bill is still a moving target, and provisions may look very different when/if they are ultimately passed. However, both of these provisions would both have a significant impact for livestock producers and should be watched carefully during the process.

Rumley , Elizabeth. “Animal Ag in the “Farm, Food and National Security Act of 2024”. Southern Ag Today 4(25.5). June 21, 2024. Permalink

June 21, 2024