Dec. 2, 2019
Dallas, TX - Jason Henderson, director of Purdue University Extension and former Federal Reserve economist, is tired of talking about the 1980s.
"Where we're at in the ag business cycle, it's not the '80s," he told a national meeting of agriculture lenders. "In my mind, we're smack dab in the middle of the 1990s and the long plateau."
Characterized by flat commodity prices and flat incomes, farmers leaned on ad-hoc government payments to make it through until the 2000s, when Chinese demand and the ethanol industry changed the paradigm.
Going forward, Henderson said, prices will continue to be shaped by supply and demand as well as macroeconomic factors, but the changes will be relatively small and within a narrow range.
"We're in the process of re-entering that plateau stage. It's going to last -- if history repeats itself -- it'll last about a decade," he said, adding that much relies on trade and the source of the next demand boom. In the meantime, "farmers are going to look to consolidate. Farmers are going to look to diversify, and farmers are going to look to the government to help them out."
Parallels to Previous Plateaus
The agriculture economy is cyclical. It booms. The boom fades, and then there's a plateau.
There have been two major plateaus since World War II, the first from 1955 to 1972 and the second from 1989 to 2003. During those periods, crop prices hovered in a narrow range near the average cost of production.
"What is the new plateau? That's the question," Henderson said. "What's the price of corn going to be? I'd say probably $4, plus or minus a quarter."
Flat prices mean flat incomes. After adjusting for inflation, farm incomes during the previous plateaus averaged just shy of $80 billion. Net farm income for 2019 is forecast at $88 billion after increasing moderately in both 2017 and 2018.
Historically, government payments become a more important part of farm incomes during plateaus, much like the Market Facilitation Program over the past two years.
MFP was initially intended to be a one-time payment to help offset the impact of lost exports due to the trade war with China, but was renewed and modified for a second year.
USDA has budgeted $14 billion for payments to farmers under the program in 2019, and Henderson expects MFP payments will make up about 20% of farm incomes. By the end of the first plateau in the 1970s, government payments accounted for 25% of farm incomes. It was 45% of farm incomes at the end of the second plateau in 2003.
"How high will government payments rise?" he said. As a USDA program created at the behest of the president, MFP is highly dependent on the state of trade with China, but it's also vulnerable to politics. "That makes the next election cycle really important."
More Consolidation, Diversification Ahead
Despite higher government payments, Henderson said, thin profit margins will force further consolidation as some producers exit the business. It will also spark a search for additional income.
"I think there are going to be profits, but it's going to be thin," Henderson said. "The people that make the most profits are those that already have the land paid for. Young and beginning farmers that are trying to pay off the land are going to struggle."
During plateaus, the primary path to profitability is increased productivity, he said. One of the first things farmers do when a boom busts is cut back on capital expenses likes tractors and combines. Then, they start calculating ways to cut input costs without sacrificing yield.
They may haggle over cash rent, but Henderson said spending on land improvements actually goes up during plateaus. "They will make investments if it produces more yield ... because ultimately that's what improves their bottom line."
Next, farmers work to diversify their income streams, whether it's by adding enterprises, growing a specialty crop or getting an off-farm job.
Henderson cautions that, like the 1990s, the next decade will see its share of fads.
As Purdue's director of Extension, Henderson hired a specialist exclusively dedicated to hemp production this year because of the intense interest in the crop. The number of licensed hemp acres surged this year as farmers hoped to cash in, and come harvest time, many found themselves without a buyer.
"If you don't have anyone to buy it and no processor, then maybe it's one of those fads," he said, adding that farmers are good at production, and hemp could be another tale of farmers producing their way out of prosperity. "If you don't have a contract or processing capacity dedicated to you, you're probably too late."
Another parallel behavior to past plateaus is farm families rely more heavily on off-farm employment. In the 1990s, the farm's share of household incomes declined from 25% to 12% as people took advantage of job opportunities created by the internet boom.
The U.S. is in the midst of the longest economic expansion in history, but many of the job gains over the past decade have been in urban centers.
"Rural areas are not back to pre-recession levels of employment. That means we must think creatively about the next set of economic activities in our communities," he told the crowd of bankers.
What the Past Says About the Future
During plateaus, land values continue to rise. In the post-war plateau, farmland gained 2.1% above inflation each year, while values grew 1.7% in the 1990s.
"So for a forecast: how about 2% plus inflation," Henderson said. "It's a long plateau. Slow and steady wins the race."
One of the primary differences between this plateau and others is the interest rate environment. Looking back to March 2018, a majority of economists on the Federal Reserve's open markets committee thought the federal funds rate would be above 3% by now. It's 2.25%.
Low rates support land values but weigh on exports.
In previous plateaus, exports grew at an average pace of 2%-3%, he said, adding that exports of bulk and semi-processed commodities stagnated while high-value, raw products, like fruits and vegetables, and fully processed, consumer-oriented goods grew.
Henderson said it looks like the ag economy is in the early years of a new plateau, which means there's "about a decade left if history repeats itself, but it all depends on trade." While resolving the trade war with China would certainly help the ag economy, it will take a new demand boom to break out of the plateau.
Where that boom comes from is the big question. Some economists say India has potential, but Henderson said it has obstacles, too. "What type of products do we sell to India that they need? We got lucky with China because what do they like? Pork. And they like soybeans to feed to their hogs." India might not want what we're good at growing.
Farmers need to think about creating value for the customer, and Henderson thinks millennials' and Generation Z's changing tastes create new opportunities for farmers to add value to their products.
In rural America in the 1990s, value added meant windmills and hunting lodges. Farmers started tree farms that evolved into pumpkin patches and retreat centers.
Today, Purdue is growing crops underneath solar panels to see if they can do both at once. A recent Farmer Mac survey of ag bankers found increased interest in renewable energy projects, particularly solar.
Sometimes the ideas are more unusual. Take a land-locked shrimp farm in Indiana, for instance, that not only caters to Chicago restaurants, but also lets locals dip a net in the tanks and catch their own shrimp.
"When people come in with crazy ideas, I'm not saying you have to finance all of them, but you might want to consider financing some of them," Henderson said. "Adding value isn't just about what's happening today, it's also what's happening in the future. To be successful in value added, it's not one and done. It's continuous evolution of enterprise."