Dr. Jason Henderson

Senior Associate Dean and Director of Extension

Purdue University

September 2019

Squeezing Profits from Agriculture Productivity

Purdue University is an equal access/equal opportunity institution

The Big Picture of Agriculture

• Ag Booms …

• The Booms Fade …

• Then Ag Plateau’s.

• What’s the New Plateau?

Plateau’s occur in all types of crops.

Index 1913=1

Source: National Agricultural Statistical Service, USDA

0

2

4

6

8

10

12

0

2

4

6

8

10

12

1866

1873

1880

1887

1894

1901

1908

1915

1922

1929

1936

1943

1950

1957

1964

1971

1978

1985

1992

1999

2006

2013

U.S. Crop Prices

Corn Rice Soybeans Wheat Cotton

0

1

2

3

4

5

6

7

1918

1924

1930

1936

1942

1948

1954

1960

1966

1972

1978

1984

1990

1996

2002

2008

2014

StrawberriesIndex 1918=1

Even Specialty Crops

A Little History: The Cycles of Agriculture

0.0

50.0

100.0

150.0

200.0

250.0

0.0

50.0

100.0

150.0

200.0

250.0

1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020

U.S. Agriculture Value-Added and Net Farm Income(Three-Year Moving Average)

Value Added Net Farm Income

Billions (2016 constant dollars)

Russian Grain Deal

World War IIChina & Ethanol

Calculations based on USDA data deflated with Consumer Price Index

Will Crop Farmers Earn a Profit in 2019?

U.S. Corn Breakeven Price

If you rent or have land payment … $4.02 per bushel

If you do not rent or have a land payment … $3.12 per bushel

Dec contract on CME 7/29/2019 $4.17 per bushel

Dec contract on CME 8/16/2019 $3.81 per bushelSource: USDA Cost of Production

U.S. Soybean Breakeven Price

If you rent or have land payment … $9.39 per bushel

If you do not rent or have a land payment … $6.43 per bushel

Dec contract on CME 7/29/2019 $9.04 per bushel

Dec contract on CME 8/16/2019 $8.79 per bushelSource: USDA Cost of Production

Farmers with no land costs make the most money.

Will Farm Bankruptcies Soar?

Commercial bank regulatory data says …

• Farmers are struggling to repay loans.

• Farm loan delinquency rates and bankruptcies are edging up to historical averages.

Source: Agricultural Finance Databook, Federal Reserve Bank of Kansas City

Real Estate Non-Real-Estate

Recent (High) 2011:Q1 3.96% 2010:Q1 3.84%

Recent (Low) 2015:Q3 1.38% 0.90%

Current 2019:Q1 2.51% 2.45%

Will Bankers Role the Loan? Depends on the Collateral.

Source: Federal Reserve Bank of Kansas City

80

90

100

110

120

130

140

150

160

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Collateral Requirement and Renewals and Extensions(Tenth Federal Reserve District)

Renewals and Extensions Collateral Requirements

Index = 100

How Strong are Farmland Values?

86688206

5407 5413

7072 6976

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Indiana Farmland Values by Soil Quality

Top-Quality Poor Quality Average

Nominal dollars per acre

Source: Purdue Agricultural Economics Department

So, How Bad is It? It’s Challenging, but NOT the 1980s.

10.0

12.0

14.0

16.0

18.0

20.0

22.0

24.0

26.0

28.0

30.0

10.0

12.0

14.0

16.0

18.0

20.0

22.0

24.0

26.0

28.0

30.0

1969 1979 1989 1999 2009 2019

US Farm Debt Ratios

Debt/Equity Ratio Debt/Asset Ratio

Percent

Source: USDA, Economic Research Service

What would it taketo reach 1980 levels?

(Debt/Asset Ratio >18)(Debt/Equity Ratio > 22)

Farmland Values Drop 30%

Or

Farm Debt Rises 30%

Farmers are stressed.But, how bad is it if they are buying tractors and land?

Source: Ag Economy Barometer, Purdue Center for Commercial Agriculture and CME, https://ag.purdue.edu/commercialag/ageconomybarometer/

0

2

4

6

8

10

12

0

2

4

6

8

10

12

Combines 4 Wheel Drive Tractors

U.S. Tractor and Combine Sales

Thousands of Unit Sales

Source: Association of Equipment Manufacturers 2019 projection based on data through July 2019

Demand for Farmland, May 2019

Farm optimism is on a roller-coaster ride.

70

80

90

100

110

120

130

140

150

160

170

70

80

90

100

110

120

130

140

150

160

170

Purdue/CME Ag Barometer

Index of Future Expectations

Index of Current Conditions

Index

Source: Center for Commercial Agriculture, Purdue University

China and North American Trade Issues

China Trade Issues

Delayed Planting and Price Increase

Aug Crop Reportand

MFP Payment

What do farmers think about agricultural trade?

Will Exports Increase in the Next 5 Years?

60% say Yes

Will China’s Soybean Trade Dispute be Resolved Soon?

70% say Unlikely

What do farmers think about agricultural trade?

Will the Resolution to the Trade Dispute with China Benefit U.S. Agriculture?

70% say Yes

Does the MFP payment relieve tariff concerns on your farm income?

70% say at Least, Somewhat

Government Payments being Driven Higher by Ad Hoc Payments

Trade Policy and

Monetary Policy

Drive Ag Cycles

Trade and Monetary Policy Drive Cycles and Plateaus

Commodity Prices & Inflation

Agricultural Trade

Interest RatesU.S. Dollar Value

Trade and Monetary Policy

2) Weak trade trims inflation, which leads to lower interest rates

and a weaker dollar, which strengthens trade.

1) Strong trade boosts inflation, which leads to higher interest rates

and a strong dollar, which cuts trade.

Federal Reserve is now talking about LOWERING rates.

Source: Federal Reserve Board of Governors

Outcome

• Lower debt service

• Asset values rise

U.S. Interest Rates Relative to Foreign Rates are Important

• Higher US rates are attractive to investors.

• International money flows to the U.S.

• Dollar rises as investor demand grows.

Strong Dollar limits Agricultural Trade

10 Year Government Bond Yields

UK

GermanyJapan

US

Interest Rates, Exchange Rates, and International Money Flows

-12000-10000-8000-6000-4000-2000

02000

1979 1984 1989 1994 1999 2004 2009 2014 2019

U.S. Net International Investment Position (Asset Minus Liabilities)

Billions of 2016 Dollars

Source: U.S. Bureau of Economic Analysis

Assets: US purchasesLiabilities: Foreign purchases

US Trade-Weighted Dollar Index - Real

Money flows to highest rate of return. Higher U.S. interest rates attract money

and boost dollar demand and exchange rates.

Stronger Dollar Money flows to the

US

Tomorrow’s economic battle is over productivity.

US Potential GDP(Average Annual Growth)

Source: Congressional Budget Office, “The Budget and Economic Outlook 2018-2028” April 2018https://www.cbo.gov/system/files?file=115th-congress-2017-2018/reports/53651-outlook.pdf

1950 -

1973

1974-1981

1982-1990

1991-2001

2002-2007

2008-2017

2018-2022

2023-2027

Potential GDP 4.0 3.3 3.2 3.2 2.8 1.4 2.0 1.8

Potential Labor Force

1.6 2.5 1.6 1.3 0.9 0.5 0.6 0.4

PotentialLabor Force Productivity

2.4 0.8 1.6 1.9 1.9 0.9 1.4 1.4

• Economic Potential Shrinks from 3% to 2%

• Need Higher Productivity to Offset Slower Labor Force

Growth

Efficiency: Producing the same products with less inputs

Value-added: Producing higher valued products

Supply-oriented vs Demand-oriented(Farmer-oriented) (Consumer-oriented)

Productivity(Dollars per input)

=Efficiency

(Output per input)X

Value-added(Dollar per Output)

How will agriculture increase productivity to boost profits?

Value-Added: Why Now? Millennials: What do they eat?

Birth Year Generation Age Today1928 – 1945 Silent Generation 74 to 90 years old1946 – 1964 Baby Boomers 55 to 73 year old1965 – 1980 Generation X 39 to 54 years old1981 – 1995 Millennials 24 to 38 years old1996 - Generation Z 23 and youngerSource: Pew Research Center

How are the Different Generation Perceived?

What Shaped their Formative Years?

https://www.purdue.edu/vpsl/resources/GenZ.html

U.S. Generations

Two Agricultures are Emerging, Does your region have the ecosystem prepared?

Commodity Agriculture• Tight margins: low cost

• Consolidation and large scale

Value-Added Agriculture• High margins: higher cost

• Small, medium scale

Supply or Demand Oriented?

Marketing: Commodity Prices or Business Marketing?

Risk Management: Price and Production Risk or Business Relationship/Contract Risk?

Lending: Credit Scoring or Relationship-based Lending?

Infrastructure: Transportation and/or Communications (Broadband)?

Conclusion

• Farm incomes will be shaped by agricultural market factors (supply/demand) and macroeconomic factors (monetary/trade policy).

• How will global economies evolve?

• Will agriculture be more supply or demand-oriented in the future?

• How can you help rural communities get ready for two agricultures?