IOWA STATE AG ECONOMIST ISSUES 10 PREDICTIONS FOR 2019
Jan. 2, 2019
Source: by Betsy Freese as it ran on Agriculture.com
1. More Corn, Fewer Beans
About 3 million acres of crop production in the U.S. will shift to corn in 2019, with a 15-billion-bushel corn crop and record-setting corn production worldwide. "This big-crop phenomena is set for years, and it's not just here in the U.S.," says Chad Hart, crop marketing specialist at Iowa State University. While the U.S. continues to be number one in corn worldwide, we will lose our number one position in soybeans to Brazil in 2019, due to tariffs.
"We're going to pull back in acreage, and they're going to add, so they will be the dominant producer for the world," says Hart. "It's a pattern that has been building for some time. The trade dispute just reinforces it."
2. More Spring Wheat
Nearly 7 million acres will come out of soybean production in 2019. That loss will happen mainly in the Dakotas, Nebraska, and Minnesota. Some land will switch to corn, but expect a jump in spring wheat and a return to fallow in parts of the Dakotas. Overall, the USDA is projecting we'll have 1 million less acres in row-crop production. North Dakota will transform, says Hart.
The state expanded in soybeans rapidly the past 10 years, but all those beans were going to China. "They could catch a train west and find that great big market. Now, that great big market is shut down," he explains. "We're going back to what is more traditionally grown in the Great Plains after an incredible run in the soybean market."
3. Corn Prices Ticking Up
Corn prices should improve in 2019 to around $3.90 a bushel due to three years in a row of strong international demand, says Hart. "What's driving this is the meat side of the equation. You import corn when you have something to feed. The light at the end of the tunnel is the global demand for meat."
On the domestic side, the demand for corn is not growing as fast. "Livestock producers are very efficient now," says Hart. "I'd love for them to use a bit more corn. Same thing with ethanol plants. They're getting more efficient." We are starting to put in a few new ethanol plants due to international demand, he says. "India is a player now for our ethanol exports. We're finding those new markets."
4. More Storage
Two years ago, a pie chart of our soybean exports looked like Pac-Man, with China gobbling up everyone else. Since then, we've seen a half-billion-bushel drop to China due to retaliatory tariffs. We have found a new home for about 45% of those beans, says Hart.
"Eventually, we'll find a home for almost all of them, but it takes time. Until then, it's hard for prices to move much. That's why we're seeing soybean stock levels build dramatically." Producers are storing soybeans and waiting for a seasonal rally. "Traditionally, we do get one," says Hart, "but I'm worried about the quality of the crop. 2018 was a slow year getting the crop out. Rain makes grain until that grain is made."
5. Trading Partners Shifting
We've doubled sales to Mexico and the European Union in the past year, and they are now our top two soybean export markets. Number three is Argentina, which used to import zero. "When the tariffs went into place, China turned to South American and bought beans as fast as and as hard as it could," explains Hart. "That caught the soybean crushing industry in Argentina off guard. It went out on the world market and said, 'Who's got some cheap beans for sale?' We did."
6. Trade Wars Get Worse. Or Better.
Who's our customer in agriculture? The world. "Everybody on this planet is our potential customer," says Hart. "If you're going to feed them, you've got to trade with them. Half of our soybean crop and 21% of our corn leaves the country. The tariff's impact will overhang the market until we get an agreement." There is good news. "Just as quickly as we got into this mess, it's possible to get out again," he says. "That's what farmers are waiting on."
7. Costs Flat, Profits Flat
What do we expect on the production cost side compared with 2018? Fuel and fertilizer prices will be a little higher, says Hart, but cash rents will be down a little. "In the end, the 2018 number of $3.60 production costs for corn is not a bad number to use for 2019. That's positive news. For soybeans, it is more like $9.50." As for profits, "It looks like 2019 will be a replay of 2018, which was a replay of 2017, which was a replay of 2016, which was a replay of 2015," says Hart.
8. More Meat
Livestock production has been growing in the U.S. for five years and won't stop this year. "We expect continued expansion," says livestock economist Lee Schulz, Iowa State University. He predicts record production of beef in 2019. Beef exports are the primary reason why prices are as strong as they are, he says. We export almost 12% of our beef and about 23% of our pork on a carcass weight basis.
Schulz predicts hog prices to be about $7/cwt higher than 2018. "We're at record hog inventory, so it's pretty remarkable that prices are where they are," he says. "That is a bullish sign for the hog industry." He is projecting about $5 above breakeven for 2019 compared with $5 below breakeven in 2018. "Some producers lost a significant amount of money in 2018, but it won't alter many expansion plans already in place."
There's been incredible investment in coordinated ownership throughout the supply chain, he explains. The pork industry has increased slaughter capacity almost 10% over the last four years. "They're going to keep investing in this system. This is a well-oiled machine." The demand for hog manure as fertilizer and the desire to diversify row-crop operations has helped fuel the expansion, says Schulz.
Tariffs are troublesome, but not a game changer, he says. "We're picking fights with the major market for pork variety meats - China. South Korea is our best friend right now. We have increasing exports to that country." The diverse portfolio of markets and our competitive cost of production have helped insulate the pork industry from a much larger impact from the retaliatory tariffs, he says. "It's difficult for competitors to overcome our cost-of-production advantage. On the world market, we're going to remain very competitive even with some of these tariff rates that have been invoked."
As for sheep and lamb, 2019 looks to be a rebound from the much softer prices we saw in 2018, says Schulz.
9. Dairy Markets Improve
Because they can't get worse, says Schulz. "Prices can't go much lower, so we're likely to see an improvement in 2019. Unfortunately, a 5% gain does not offset the large losses we've seen over the last several years. The dairy industry has been in tremendously tough times."
10. More Farmers Selling Assets, Retiring, Filing Bankruptcy
Charles Brown, farm management specialist with Iowa State University, gives this example of a crop farmer he has worked with for four years: In 2015, Joe had a net worth of $2.6 million and $272,000 in working capital. "Any lender would have liked to have Joe as a client," says Brown. By the end of 2017, Joe's working capital had dropped to $56,000; today, it is zero. "This is common for many farmers. It's not a net worth problem," says Brown. "Working capital is disappearing." Many farmers are refinancing their debt to lengthen out loans and to improve cash flow, but Joe decided to sell assets and retire.
Sullivan Auctioneers in Hamilton, Illinois, has 76 farm auctions the last two months of 2018. "It's not as much fun farming today as it was in 2012," says Brown. "For some farmers, it's better to sell out, take the money, cash-rent the farm out, and look forward to winter."
If you have to improve your cash flow and you don't have the ability to refinance, sell assets. Check the back of your machine shed, make a list of nonproductive assets, and sell those first.
One key tip: Before you sell assets, contact your accountant about the tax consequences. Make arrangements to withhold enough money to pay your taxes. "Don't be stuck giving all the proceeds to the lender with no money left to pay the taxes," says Brown. If you are going to need to file Chapter 7 bankruptcy, do not sell the assets before you take the bankruptcy. "If you sell it before, you are going to incur the income tax liability. If you sell them in the bankruptcy estate, you may pay little or no taxes on the sale of those assets."