Net farm income is forecast to grow almost 4.8% to $88 billion in 2019, but this broad measure of profits includes financial support from the federal government. Direct government payments (excluding crop insurance) to U.S. farmers are projected to hit $19.5 billion in 2019, the most since 2005.1 There are also significant regional differences in the economic picture for U.S. farms, in addition to a troubling rise in debt.2 According to Moody's Analytics, farm incomes in the Midwest have dropped by more than 30% between the first and second quarters of 2019, and many producers are going out of business entirely.3
U.S. farm bankruptcies are up 24% for the year (through September 2019). Chapter 12 filings have risen in every region of the United States, but more than 40% of farm bankruptcies were in the 13-state Midwest region, where the total (255) rose to the highest level in more than a decade.4
The U.S. agricultural industry endured several years of low crop prices before uncooperative weather and an escalating trade war with China inflicted further damage in 2019.5 Here's a closer look at the obstacles faced by American farmers, and the ripple effects on rural communities and regional economies.
The potential for damaging weather is a regular source of uncertainty and stress for farmers. In the spring of 2019, historic rains and floods in parts of the Midwest farm belt delayed the planting of soybeans and corn, by far the nation's top two cash crops.6
Crop insurance — funded in large part by the federal government — may help some farmers offset their losses. Crop policies help protect against lost crop yields due to drought, freezes, disease, and other natural causes. Prevented planting payments help compensate for costs incurred in preparation for planting that never takes place. For some farmers, these indemnity payments may exceed the economic returns from a late-planted and poor-yielding crop. As of August 2019, nearly 20 million acres were prevented from being planted: more than double the previous record.7
China was one of the top buyers of U.S. farm products from 2009 to 2017, before imports plunged from $19.5 billion in 2017 to $9.1 billion in 2018. U.S. farmers have been contending with retaliatory tariffs since mid-2018, but the trade conflict came to a head in August 2019 when the Chinese government suspended all imports of U.S. agricultural products.8
Trade talks and purchases of some agricultural products have since resumed, and an agreement could eventually provide much-needed clarity. But the longer the trade tariffs remain in effect, the harder it could be to recover Chinese market share that has shifted to other suppliers.9
In November, Midwest farmers fought an early blizzard to harvest crops that were planted late in the spring. Agricultural disasters were declared in numerous counties where crops were ruined by extreme fall weather, making affected farmers eligible for emergency loans and other types of disaster aid.10 Farmers who were unable to plant their fields, whether insured or not, can also apply for federal disaster funds. The U.S. Department of Agriculture was allocated $3 billion for nationwide disaster relief intended to help cover farm losses caused by hurricanes in 2018 and severe weather in 2019. 11
Trade aid programs under the Trump administration provided $28 billion in assistance for farmers affected by the trade tariffs and the loss of traditional export markets — $12 billion in 2018 and another $16 billion in 2019. Farmers could receive direct payments for eligible crops, ranging from $15 to $150 per acre, depending on the impact of trade retaliation in the specific county.12
Moody's estimates that farmers received a total of about $50 billion in federal financial support from the fourth quarter of 2018 through the third quarter of 2019.13
Production from some 2 million American farms accounts for only about 1% of U.S. gross domestic product (GDP). But the agriculture sector's overall contribution to GDP is much larger because related industries — textiles, apparel, food and beverages — and businesses that sell and serve food and beverages all rely on farm inputs.14 Farm profitability also affects the earning prospects of large agribusinesses that supply seeds, fertilizer, and machinery.
U.S. gross domestic product grew at a modest 2.1% in the third quarter of 2019, so the relatively small drag on the national economy from farm losses may be unnoticeable.15 Even so, farm-belt states are struggling. When a region suffers large-scale farming losses, it affects local employment and consumer spending, spreading financial hardship in rural communities. In fact, the Midwest Economy Index, which tracks nonfarm business activity in five states (Illinois, Indiana, Iowa, Michigan, and Wisconsin) has declined for seven straight months, from April through October.16
The economic impact also differs from farm to farm. Payouts from the trade aid program varied widely and left some farmers more exposed to losses than others. Large farms are also more likely to have the resources to withstand rough patches, but small and midsize farms are more vulnerable. As a result, current market conditions may result in further consolidation as big corporations buy more farm land from smaller farmers in distress.
There is hope on the horizon for farmers who are worried about the financial ramifications of a prolonged trade conflict. On October 11, the Trump administration reported a tentative "phase one" trade deal with expectations of a Chinese commitment to purchase up to $50 billion of agricultural products annually.17 Although negotiations on a limited deal are reportedly progressing, the final terms and signing date have yet to be announced.
Posted: to Wealth Management News on Tue, Jan 28, 2020
Updated: Mon, Jan 27, 2020