Esther George, a sixth-generation farmer, remembers the 1980s and, comparatively speaking, believes today’s economic situation doesn’t look all that bad. She notes there’s been a lot of farm consolidation but says banks have been minding their underwriting standards carefully.
“That said, I don’t want to underestimate the stress that I think exists today or could come,” says George, Federal Reserve Bank of Kansas City president.
As a member of the Federal Open Market Committee, George says she supports the Fed’s shift from accommodative monetary policy to a more neutral stance through gradual increases in the federal funds rate. While that will help keep the overall economy in check, she acknowledges it could cause pain for some parts of
“This does not help when you have marginal borrowers or borrowers that are struggling,” she says. “It doesn’t help with, perhaps, young farmers that incurred a lot of debt for the purchase of land or equipment. And so, there are pockets of stress as we look around. I don’t think anything is at the point that we think is alarming at this stage. But the question is: How much longer will we experience this continuation of low commodity prices, low farm incomes?”
TRADE POLITICS. Another major uncertainty continues to be agriculture’s role in a global economy. It’s increasingly uncertain amid renegotiation of the North American Free Trade Agreement (NAFTA), steel and aluminum tariffs, and a host of other tit-for-tat tariffs with China over intellectual property concerns.
“You hear all the time that there are no winners in trade wars, only casualties; and, I think it’s also the case that trade wars aren’t easy to win because of that,” says Joe Glauber, a senior research fellow at the International Food Policy Research Institute. “Every time you say, ‘I’ll punish them. I’ll show them. I’m going to raise tariffs,’ someone on your side is also being hurt by that.”
At press time, a renegotiated NAFTA agreement was expected to be finalized before U.S. elections in November.
Glauber believes the U.S.’s trade dispute with China could have long-term concerning consequences. In 1973, the U.S. imposed an embargo on soybean sales that only lasted a few weeks, but it was enough to encourage Japan to begin buying soybeans from Brazil and the European Union to institute new supports for oilseeds. The U.S. later challenged Europe’s policy at the World Trade Organization.
Brazilian soybean prices are $60 per metric ton higher than in the U.S., Glauber says. “If these differentials continue, Brazil producers will have strong incentives to plant more beans and take most, if not all, market expansion expected over the next few years.”
PRICE PROTECTIONS. U.S. producers could receive some price protection in the short-term through revenue insurance, since spring price guarantees were set before trade disruptions caused significant price declines. If trade uncertainty continues into next year, however, all bets are off.
The administration continues to say ongoing trade issues will not hurt farmers. Agriculture Secretary Sonny Perdue recently provided details on an aid program that will send $4.7 billion of payments to farmers, with soybean growers collecting the most. The administration will also purchase surplus commodities and provide $200 million for additional market development efforts. These are ideas Glauber struggles with.
“I think while some want to be sympathetic to farmers as pawns in a trade war, I fear this diminishes the cost of such actions and creates a moral hazard, if you will, for policymakers,” Glauber says. “These are painful decisions.” He believes such assistance would disguise long-term costs of trade disruptions, and farm incomes and profitability would still suffer.
FARMLAND VALUES. And, there’s a bigger risk Glauber notes: Farm profitability is one of the key factors underlying and supporting farmland values. After five years of falling farm incomes, Glauber says he’s surprised farmland values have been so resilient.
“I would have thought with the softness in prices that you would see that come down. I think good farmland still captures really good prices,” he says. “One of the bigger questions I’ve have is what happens when interest rates go up? Do you start to see softness in land?”
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