American farmers are cautiously optimistic about 2019 despite dire predictions and trade fights

  • Farmers have faced several years of lackluster profits, and supply concerns could keep prices at depressed levels in the new year.
  • The difficult conditions in the farm sector have caused soybean and pork operations to lose money and driven dairy farmers out of business.
  • Barring any major breakthrough on trade, economists and bankers are not hopeful about a significant upturn in farm profits in 2019.
  • Even so, farmers are cautiously optimistic about the new year.
A trailer is filled with soybeans at a farm in Buda, Illinois, July 6, 2018. 
Daniel Acker | Reuters
A trailer is filled with soybeans at a farm in Buda, Illinois, July 6, 2018. 

From trade tensions to supply concerns, farmers face daunting challenges and more uncertainty heading into 2019. But farmers are cautiously optimistic about the outlook despite predictions of more pain ahead.

Low commodity prices and trade disputes have led to tough times for farmers and caused soybean and pork operations to lose money. The difficult conditions in the farm sector also have driven more dairy farmers out of business.

"If you look at the heartland of the U.S., which is largely propped up by corn, soybeans and wheat, we're going into year five of a pretty difficult time," said Curt Hudnutt, executive vice president of Rabo AgriFinance and head of rural business in North America for Rabobank. "So we expect there to be challenges in 2019."

Barring any major breakthrough on trade, economists and bankers are not hopeful about a significant upturn in farm income in 2019. Farmers have faced several years of lackluster profits, and supply concerns could keep prices at depressed levels in the new year.

The U.S.-China trade war resulted in Beijing slapping retaliatory tariffs on thousands of U.S. goods, including soy, corn, beef, pork, tree nuts and dairy products. China also targeted other industries, including chemicals and machinery.

Soybeans

American soybean farmers have been among the hardest hit by China's tit-for-tat tariffs. Through Friday, U.S. soybean futures are down 11 percent from prices set in early April before the 25 percent tariff on U.S. soybeans was announced by Beijing.

"If you're raising corn or soybeans right now it's a pretty sobering crop outlook," said David Widmar, co-founder of Agricultural Economic Insights, an Indiana-based ag research and consulting firm. "A few years ago it was wheat taking the big hit."

In the first 10 months of 2018, U.S. shipments of soybeans to China fell by about 62 percent, reaching 8.2 million metric tons, compared with 21.4 million metric tons in the year-ago period, according to government figures.

The soy tariff, which took effect July 6, resulted in China turning mostly to Brazil and Argentina for its beans. Brazil already is the world's top soybean exporter and continues to increase its soy acreage and is expected to have its largest-ever crop in the 2018-19 season.

The recent bit of good news is China this month returned to buying American soybeans after a nearly six-month absence without substantial purchases. There have been at least three rounds of U.S. soybean purchases by China this month, and it follows Washington and Beijing agreeing on Dec. 1 to a temporary trade truce.

Trump's farm aid

The Trump administration's emergency trade aid program for farmers affected by the retaliatory tariffs will provide some relief for certain commodity producers. The so-called market facilitation program involves $9.6 billion and is designed to mitigate the impacts of tariffs imposed by China, Mexico and other countries.

President Donald Trump speaks to the press before departing the South Lawn at the White House in Washington, December 7, 2018. 
Jim Young | Reuters
President Donald Trump speaks to the press before departing the South Lawn at the White House in Washington, December 7, 2018. 

The U.S. Department of Agriculture expects soybean producers to get a total of about $7.3 billion in direct payments from the market facilitation program.

"The second tranche of the trade mitigation program is going to help farmers that are in some pretty tough times," said Richard Guebert, president of the Illinois Farm Bureau and a grower of soybeans, corn and wheat. "It will not make them whole, but it buys them time that they can meet their obligations and get past the first of the year."

For soybean producers, the trade aid comes at a critical time when many have completed the harvest but still have ongoing expenses. Some farmers face soaring storage costs this year after deciding to hold on to more of their crop in hopes of seeing better prices next year.

"I do have hope and optimism that things will get better in 2019," said Guebert. "But we still have a lot of things to work on to get there."

Last year, China bought more than $12 billion worth of U.S. soybeans, representing nearly 60 percent of all U.S. soy exports, according to the USDA.

Trade tensions could heat up again in 2019 as the temporary truce in the U.S.-China trade war is set to expire March 1. The truce could be extended, but a long-term trade deal to resolve differences between the world's two largest economies remains elusive.

In addition, the new United States-Mexico-Canada Agreement still needs to be formally approved by all three countries and doesn't remove tariffs the allies placed on a variety of U.S. food and agricultural products, including some meats and dairy-related goods. The retaliatory levies were in response to President Donald Trump imposing import duties on foreign steel and aluminum products.

Sagging farm income

Without trade issues getting resolved, no major uptick in net farm income is anticipated in 2019. Also there are oversupply concerns with some major commodities, including soy, as the USDA projects domestic soybean stocks will reach 955 million bushels by the end of the 2018/19 marketing year, doubling from the year-ago period.

"We still have an awful lot of supply here in the U.S.," said Daniel Kowalski, an economist and vice president of CoBank's Knowledge Exchange Division. "We have too much milk, too much grain, too many soybeans, among other things."

Corn loaded in trucks is seen at Wessling Farms near Grand Junction, Iowa. 
Scott Morgan | Reuters
Corn loaded in trucks is seen at Wessling Farms near Grand Junction, Iowa. 

Net farm income, considered a broad measure of farm profitability, is forecast to decline 12.1 percent to $66.3 billion in 2018 when compared with 2017, according to the USDA. If that is realized, the agency said inflation-adjusted net farm income would be 3.3 percent above 2016, a year when it reached the lowest level since 2002.

"Farm income in 2018 is going to be half of what it was in 2013," said Kowalski. "And it's unlikely to be decisively better in 2019."

In December, the Federal Reserve Bank of Chicago released its quarterly AgLetter and said a survey of agricultural bankers found 61 percent who responded expected more "forced sales or liquidations of farm assets owned by financially distressed farmers" to increase over the next three to six months when compared with the prior year.

"There's concern that multigenerational family farms probably won't be able to continue because of these continuous low prices and decreased farm income," said Kevin Papp, president of the Minnesota Farm Bureau and a corn and soybean grower.

The farm downturn also is a setback to the rural economy as agricultural households facing financial stress look for ways to tighten their belt and hold back on purchases of cars, farm equipment and other items.

"There's a direct correlation between the pain on the farm and pain on Main Street in rural America," said CoBank's Kowalski. "This impacts local businesses across the board."

Pork and beef

In the pork sector, producers have been pressured by hog prices below the costs of production and faced retaliatory tariffs imposed by China as well as Mexico.

Scott Morgan | Reuters

The value of U.S. pork exports to China (including Hong Kong) fell 16 percent in the January-October period compared with a year ago, according to the U.S. Meat Export Federation. For Mexico, the export value of U.S. pork shipments declined 9 percent in the same period.

Demand for U.S. pork could recover in 2019 given there have been widespread outbreaks of African swine fever in China since August, resulting in more than 630,000 pigs being destroyed. The incurable disease, which is not dangerous to humans, isn't limited to China, since there have been several farms hit with the swine virus this year in Europe.

In the U.S. beef sector, the beef cow herd is expected to increase slightly next year as strong domestic and global demand continues.

"The beef cow herd is expected to remain pretty stable and potentially just increase a hair so we will still be under pressure from a lot of beef supplies," said Kevin Kester, president of the National Cattlemen's Beef Association and a California cattle rancher. "That's why it's important to keep our export markets going."

The U.S. beef industry has seen record value exports this year to South Korea, Taiwan and the Philippines, according to USMEF, the meat export trade group. But the industry faced a setback of sorts in July when China imposed an additional 25 percent tariff on American beef products on top of the 12 percent import levy that already existed.

"We're not expanding probably what we would be doing (in China) if the tariffs weren't there," said Kester. "Right now the U.S. beef has a 37 percent tariff."

But Kester said exports into the Hong Kong market "are exploding. We are going to be over $900 million (this year) into Hong Kong. It doesn't take a rocket scientist to see that probably quite a bit of that ends up in China someplace."

Dairy struggle

For the dairy sector, though, hard times have forced some smaller dairies out of business through foreclosure and others have exited on their own after having negative profit margins for five years. The tariffs from China and others have only exacerbated the dairy industry's pain.

A dairy farm worker Jorge milks cows at Mancebo Holsteins in Tulare, California.
Jane Ross | Reuters
A dairy farm worker Jorge milks cows at Mancebo Holsteins in Tulare, California.

The U.S. Dairy Export Council reported this month that total "U.S. dairy exports are on track for a record year despite flat sales on both a volume and value basis in October due to a loss of sales to China since implementation of retaliatory tariffs." U.S. suppliers saw sales of cheese to China plummet 59 percent in October after a 63 percent decline in September.

Also, the U.S. dairy industry faces over-production issues, including a record U.S. cheese stockpile — roughly 1.4 billion pounds in cold storage. U.S. dairies produced near-record amounts of milk, and in turn processed it into products such as cheese that can last longer.

"It's finally gotten to a crisis proportion over the last year," said Peter Vitaliano, vice president of economic policy and market research at the National Milk Producers Federation, an Arlington, Virginia-based trade group. "We've been seeing a lot of reports of producers, especially the smaller producers in the upper Midwest and the Northeast, going out of business."

Vitaliano added, "Modest price and margin recovery that is forecast next year may be too little, too late for some of the smaller farms, unfortunately."