2015-12 PAER: Agricultural Outlook for 2016

December 1, 2015

Farm incomes have taken a sharp hit! It feels like a new era for U.S. agriculture so, in these articles, we give our reasons why we believe that is the case. Many of the economic drivers that stimulated crop incomes have now turned more negative. First world production of major crops have exceeded world consumption for multiple years now and as a result, grain inventories have moved much higher. Second, the overall biofuels growth rate has slowed. Third, income growth rates in developing economies such as China have slowed. Fourth, a weak U.S. dollar in the boom years stimulated high agriculture prices, but now the dollar is strong and this is casing negative trade impacts which tend to weaken agricultural prices. Fifth, agriculture’s boom period was also stimulated by monetary policy that kept interest rates abnormally low adding to more profitability in agriculture and contributing to higher land values and cash rents. Now the FED appears ready to shift toward higher interest rates, perhaps for several years to come. Higher interest rates could strengthen the dollar even more and further damage trade prospects. Higher interest rates will also increase agricultural production expenditures thus cutting profitability, and they are likely to contribute to lower land values.

Our overall belief is that agriculture will not go through a bust like the 1980’s, but rather a period of moderation. This period will be characterized by the need for crop agriculture to adjust back to a more normal economic environment. Animal agriculture is also going through the adjustment back to more normal feed prices. This has meant a relatively rapid expansion of animal product production in 2015, with even higher production in coming years. This higher production will tend to lower animal product prices and tighten producer margins.

The chart of farm income tells the story. U.S. farm income from 2011 to 2014 averaged $105 billion a year with record income in 2013 of $123 billion. Crop incomes were dropping quickly in 2014, but incomes from animal production were at record highs. Now in 2015, crop incomes have continued to drop and the buildup of production in the animal industries has lowered those incomes as well. Farm income fell to just $56 billion which is approaching half of the average incomes from 2011 to 2014.

Income prospects appear weak for 2016 with continued weak crop prices and lower animal product prices compared to 2015. Production agriculture will need to continue to make adjustments in which they “tighten the belt” and strive to drive costs per unit lower. In addition, they should plan on several years of these adjustments. The financial positions of many in agriculture are expected to be under pressure with the possibility of negative cash flows and with the potential for declining asset values.

Articles in this Publication:

U.S. Economic Outlook: Slow but Steady Ahead!

Weak Ag Trade Outlook Drags Farm Income

Is the 2014 Farm Bill Working?

Food Price Inflation Remains in Check

Applying the Brakes to Dairy Production Growth

Hog Producers Facing Losses

Beef Cattle: A Tumultuous Year

Grain Prices Remain Depressed

2016 Purdue Crop Cost and Return Guide

Times Require Financial Management and a Great Lender

Why Farmland Values will Drop in 2016?

Cash Rents Continue to Adjust Downward

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