Farm Bureau Economists Share Insights on Trade, Taxes, the Farm Economy and More

From the outlook on the overall U.S. economy to the impacts of tariffs and tax reform on farmers and ranchers, the American Farm Bureau Federation’s four economists shared their insights on a variety of topics during a workshop at the American Farm Bureau Federation’s 100^th Annual Convention.

Beef, Pork and Poultry

AFBF economist Michael Nepveux detailed the strong outlook for animal protein consumption.

Because most U.S. pork, beef and poultry is consumed within the country, the farmers who raise those animals are typically far less affected by the trade turmoil.

“While exports certainly serve as a vital market, we still rely very heavily on domestic consumption,” he said.

Still, there is quite a bit of growth in export markets. “With beef and pork, in particular, the domestic market is somewhat of a ‘mature’ market. So, as we keep expanding production we need somewhere to put the protein, and that’s usually overseas.”

The pork sector’s efforts to expand its production and its reach into foreign markets over the last decade has pushed up their exports to almost 25 percent of their production.

Though all three meat sectors will continue to grow, Nepveux said, the pace will likely moderate, especially for beef. “We’ve got a lot of beef, but we were saved this year by higher-than-expected domestic demand, as well as exports.”

Many of the largest foreign destinations for U.S. beef, like Japan, are not problematic markets. Beef exports to Canada did slip a little bit, but the free trade agreement with South Korea provides additional opportunities. Ultimately, U.S. beef exports for 2018 were a record 3.1 billion pounds.

Pork production since 2015 has been steadily increasing, to the point that hog inventory in December 2018 was the highest ever reported. Pork took a harder hit than beef in the trade war with China. That, coupled with record production, pushed prices down, making pork more appealing to other foreign customers. “Yes, people were buying more, but at a discounted price,” Nepveux said.

On the dairy front, record milk production coupled with decreasing consumption in the U.S. will likely result in U.S. dairy farmers exporting more milk than the U.S. is consuming as Class I fluid milk within the next decade.

Ramped-up poultry production has resulted in more product in cold storage and lower prices, which will likely lead to the industry rebalancing in the near future. Though exports may have slipped a little in China, Mexico and Hong Kong, other buyers—like Vietnam, Taiwan and Angola—have stepped up to take advantage of the lower prices.

Crop Consumption and Outlook

Economic analyst Megan Nelson’s update on 2018/19 crop consumption pace and outlook for acreage this year showed trade troubles with China are driving some U.S. agriculture exports down significantly.

At 629 million bushels, soybean exports are down 49 percent, or 609 million bushels, compared to this time last year, according to USDA’s Jan. 7 Federal Grain Inspection Service report.

“The main driver for this is decrease is the 98 percent drop in soybean exports to China, representing 708 million bushels,” Nelson explained.

In addition, China’s revisions to its grain balance sheet extending back to 2007/08 led to a major shift in the world supply and demand estimates, adding a cumulative 10.5 billion bushels to its corn production from 2007/08 to 2017/18. “This addition resulted in global corn stockpiles increasing 106 percent—from 5.8 billion bushels to 12.2 billion bushels—for 2018/19 and 8.2 billion bushels for Chinese stocks alone.”

Many people, Nelson said, are wondering which crop soybean farmers will move to, considering their dire market situation. Higher corn prices have many analysts predicting corn production will increase between from about 90 million bushels to 92 million bushels, which is about a 2 percent increase. Similarly, higher wheat prices will also likely result in boost to wheat acreage.

Highlighting some commodity-specific events, Nelson said, “2018 brought on a slew of catastrophic weather conditions throughout the Cotton Belt, leading to 3.6 million acres abandoned. That’s about 26 percent of total U.S. planted cotton acres.”

Trade, Labor and Taxes

AFBF economist Veronica Nigh discussed trade, labor and tax policy.

On the labor front, Nigh addressed the sharp uptick in certified H-2A positions. “In some states and for some positions, the increase is hardly surprising, but we’re seeing increases in all states and for a variety of positions,” she said.

In 2018, H-2A numbers rose 21 percent from the previous year, and in 2019, we could see an 18 percent jump from the previous year. “That means we’ll certify almost 300,000 positions, which is a lot of positions considering we were at less than 100,000 just seven years ago,” Nigh said.

Just as the number of certified H-2A positions is growing, so is the minimum wage rates for H-2A workers, known as the adverse effect wage rate. The rate for 2019, $12.96, is a 6 percent increase from 2018. But, as Nigh pointed out, farmers’ and ranchers’ profits are hardly growing as steadily.

While beans have been in the trade-related headlines, exports of sorghum, pork, apples, cherries, seafood, whiskey, ginseng and some processed foods are also suffering. Together with soybeans, the U.S. exports of these commodities to the retaliating countries represent 30 percent or more of their total exports.

The recently implemented Tax Cut and Jobs Act gives a boost to farmers and ranchers by reducing individual tax rates, providing unlimited bonus depreciation and doubling the estate tax exemption. Had these provisions been in place in 2016, the average effective tax rate for a farm would have been reduced by 3.3 percent, according to a study by the Agriculture Department’s Economic Research Service.

The legislation’s 20 percent business income deduction will be especially helpful, Nigh noted.

“Had the deduction been available in 2016, over 46 percent of farmers would have been able to use the it and the total amount of this deduction from taxable income would have been $9.6 billion,” she said, again citing ERS.

U.S. Farm Economy

Dr. John Newton, chief economist, said the strong overall U.S. economy, boasting 36 consecutive quarters of positive gross domestic product growth, is pushing unemployment rates to a nearly 50-year low. Despite this stellar performance consumers are starting to get shaky.

“Concern over interest rates and the trade war is starting to show itself in a decline in consumer and CEO confidence in the U.S. economy,” Newton said. Interest rates have gone up nine times since the recession started, and some were initially thinking the Federal Reserve could bump them up as many as four more times this year. President Trump’s pressure on the Federal Reserve chairman could hold those increases to no more than two.

At $66.3 billion, net farm income in 2018 was the third lowest in the last 20 years, when adjusted for inflation. Though farmers appear to be pulling in more money, they’re spending a lot more to raise their animals and grow their crops. “Cash receipts have gone up, but so have production expenses, including servicing debt,” Newton said. Another factor in cash receipts are government payments, which, at $13.6 billion, were up 18 percent from the previous year.

The University of Missouri is projecting net farm income will again decrease this year, but two key factors—disaster payments and trade mitigation assistance—remain unknown, as does crop size.

Farm debt is a record $410 billion, ballooning by $105 billion over the last decade, with a lot of that coming from real estate. “If you look at how much of our debt is represented by the annual income in agriculture, this year it’s at 97 percent. That’s a 32-year high. Another year of low prices, combined with higher interest rates and higher costs of servicing those loans, really make you wonder how long we can continue to be in this situation across agriculture.”

Similarly, the U.S. debt-to-asset ratio is on the rise, although it’s nowhere near what it was in the 1980s, thanks to the high value of agricultural assets. Clocking in a $3.04 trillion today, U.S. agriculture’s assets were valued at $775 billion.

You can find more from Newton, Nigh, Nepveux and Nelson—the team behind Market Intel—here.

Check out the PowerPoint slides from the economists' presentation.