MENOMONIE — If the production agriculture business cycle holds true to past form, the industry is on the edge of recovery and a return to relative stability ahead of the next boom, sometime in the future.
So, where are we in that cycle?
“I don’t know,” David Widmar of Agricultural Economic Insights told farmers attending a Jan. 22 conference hosted by Ag Risk Managers in Menomonie. “We’re all kind of holding our breath; the markets are holding their breath, too. … Will we start recovery in 2019, or are we going to resume the margin squeeze?”
Despite the current uncertainty, Widmar said there are many reasons to be optimistic about the future of agriculture.
Widmar said agriculture is in a holding pattern as critical trade negotiations with China, Mexico and other countries continue into this year. Chinese demand for soybeans since increased nine-fold since 2000, and they buy six out of 10 beans globally. Historically, much of that has come from the U.S., but as the trade war lingers, Brazil and other nations are responding to market signals to plant more soybeans.
“It’s concerning, and it leaves the U.S. on a big pile of beans of our own,” Widmar said.
Widmar said beef could be the next big market opportunity in China, as the country’s consumption has recently surpassed their own production. China, now the world’s third biggest beef consumer, is on a trajectory to becoming the biggest in 10 years. Ethanol also will likely be part of the trade negotiations.
Stability coming, but when?
Agriculture spends most of its time in stable periods, he said. Over the past 90 years, there have been only three boom eras — just after World War II, in the 1970s with the wheat exports to Russia and about 2013. Wisconsin farm income for 2016 and 2017 was 50 percent lower than during the most recent boom, Widmar said.
“We have spent 2014-18 in an oversupply situation, textbook oversupply,” he said, and demand concerns remain in 2019 and beyond. Although the industry has been working through the oversupply, he said, “the best-case scenario is we return to a stable period. We’re not going back to a boom, in my crystal ball.”
Farm booms are rare and always come to an end, Widmar said, and the industry had a road map for getting through this margin squeeze. That is, until the trade situation emerged last year. Acreage and yields will be key to whether farm income bounces back this year or not until 2020.
While the situation in agriculture, as measured by real net farm income, isn’t as dire as it was in the 1980s, as “we went into this downturn with solid financial footing,” he said, there’s still plenty of cause for concern as there continues to be significant financial erosion.
Widmar said a long stable period likely lies ahead for U.S. agriculture. While stable eras aren’t great, they are “survivable.”
He encourages farmers to know, track and monitor their business’ working capital, calling this the “original risk management tool.” Working capital is how much financial “breathing room” an operation has.
Producers also should have a handle on how much of their income goes into servicing debt. According to his 2018 U.S. Department of Agriculture data, the debt service ratio on U.S. farms was 28 percent and the operating expense ratio (such things as feed, seed and fuel) was 71 percent, for a concerning total of 99 percent, which doesn’t leave much for family living expenses, property taxes and depreciation costs.
“There’s not enough revenue at the end of expenses,” Widmar said. “Right now, farms are living off depreciation.”
While agriculture isn’t in a financial “tsunami” as in the 1980s farm crisis, since there’s more of a concentration of debt this time, it’s definitely a steady “drip, drip, drip” and continued erosion, he said.
Of real concern in the farm economy is liquidity, or the ability to service debt and pay bills. Farms with liquidity issues are urged to take immediate action before it becomes a full-blown solvency problem.
Widmar’s five management tips for 2019 include knowing the economics of a farm business. Top farm managers know their cost of production and overall financial situation.
“We have to get better at this,” he said, adding that cost management will be key. “We have to find $1.50 per bushel in the soybean budget; corn looks more favorable but not that much more.”
Producers also must recognize the role of skill vs. luck and not confuse outcomes with the quality of decisions made. Think critically about uncertainties, Widmar suggests. Start with good forecast questions, avoid bias and continually calibrate.
Farmers should think about their business strategically — what investments are needed, when to make them and how to deploy profits — and execute that plan. Avoid stupid mistakes, he said.
“This is a time to focus on not being stupid. Don’t overthink yourself,” he said. “If there’s an opportunity to lock in a profit, this is probably the year to do it. Don’t try to outsmart the market.”
Also during the conference, Fran Felber of Barron-based ARM Services offered his rules for becoming a better grain marketer: Don’t let emotions cloud judgment, be willing to sell cash grain, develop a marketing plan, consider options, use self-discipline and money management, track basis and don’t lift hedges until selling the cash.
He also touted the benefits of the new farm bill for milk producers, as it finally makes milk an insurable commodity.
“The dairy program is wonderful for farmers with under a few hundred cows,” Felber said. “For larger farmers, it depends on how big you get, but it never goes too bad.”
The new Dairy Margin Coverage program, he said, is the Margin Protection Program “on steroids.” On top of that, producers also can use the Dairy Revenue Protection program through Michigan Farm Bureau and LGM-Dairy.
“Which one is better depends on your size and what you’re trying to manage,” Felber said.