Early signs of spring for the farm economy

Cautious lenders rarely make wild predictions of a boom ahead. But after five years of losses and tight margins for grain producers, one of them thinks that 2020 is likely to be a better than the year that just ended.

"We are guardedly optimistic as we look forward," Jim Knuth, senior vice president at Farm Credit Services of America said Tuesday at the Land Expo 2020 in Des Moines, Iowa.

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Knuth gave six reasons for that optimism.

1. Progress in trade agreements

Progress in trade agreements was made clearer this week with the signing of the Phase One agreement with China Wednesday and passage of the United States-Mexico-Canada Agreement (USMCA) in the Senate the same day.

"In 2019, we didn't have much progress. We had a lot of talk. We had some speculation," Knuth said.

2. Another Market Facilitation Program

Another Market Facilitation Program (MFP) in this election year. (Knuth clarified to reporters later it would be a new program, not the third tranche of MFP payments expected this winter.)

"We think this will be the last one," Knuth told a nearly full breakout session at the Expo. "But the fact is, it's going to be politically popular. Both sides of the aisle support farmers and agriculture."

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3. Improved stocks-to-use ratios

Improved stocks-to-use ratios for corn and soybeans, which are considered a good indicator of supply and demand.

"The fact is that as we sit here today, they're much better than anticipated just a few months ago," he said. The corn ratio was expected to be above 15%, which indicates a soft market for corn. It's now below that level. The soybean ratio remains "historically high," he said, but it's also trending down, to just over 10%, which is at the high end of the 6% to 10% range once considered normal.

4. Continued low interest rates.

"The fed will likely be pretty neutral. These long-term rates look like they're fairly stable," he said.

5. Stable land values.

Knuth shared sales and appraisal data from Iowa and the other three states where the lenders finance agriculture: Nebraska, South Dakota, and Wyoming. Prices for high-quality corn ground have been stable over the past five years, he said. If U.S. net farm income starts to improve, Knuth expects little upward pressure over the next few years as farmers rebuild working capital.

6. Better weather.

"It can't be worse," he said. "Theoretically, it could, but, boy, we had tough planting and tough harvesting. So, again, we're guardedly optimistic that our weather will be better for farmers in 2020."

Another sign of better times, perhaps, is that Knuth talked less about the need for farmers to treat their operations as a business. Most do, of course, and Farm Credit Services of America borrowers had better financial performance in 2019 than 2018, according to early analysis of their records. In 2018, 71% of their 25,000 borrowers with operating loans had positive earnings (earned net worth gain after depreciation). In 2019, Knuth said it could be around 80%.

In the past, Knuth has offered as many as 13 ways for grain producers to have those positive numbers. This year, he boiled management practices of successful producers down to "the big four."

1. They treat their operation like a business, he said. "In fact I've had customers say literally those exact words to me."

2. They review financial numbers on a regular basis, often monthly or quarterly. "They're allowing those numbers to drive their business decisions," he said.

3. They put time and priority into marketing. "This is not the last thing they do. They make this a priority. They're proactive. They pull the trigger. They preharvest market. They're getting professional help."

4. They seek professional help and advice. "Grain production agriculture is complicated, capital intensive . . . It's hard to go it alone." Advisers include accountants, crop insurance experts, and agronomists, as well as marketing experts. "They're forming a trusted, business adviser farm team."

Farmers who do those things are also becoming better business negotiators, he added. They're rethinking how they use equipment. "They've walked away from poor business arrangements."

"Grain production agriculture has adjusted to the current economic environment," Knuth concluded. "When we see 80% or more of our producers with a net profit in 2019, that means the industry has adjusted.

"At the end of the day, it's all about the business of agriculture," he said. "Those producers who are increasing their business, financial, and marketing acumen, they're being rewarded."