Minding Ag's Business

Factors that Will Guide the Ag Economy in 2019

Katie Micik Dehlinger
By  Katie Micik Dehlinger , Farm Business Editor
Virginia Tech professor emeritus David Kohl shared what factors could affect the agriculture economy in the year ahead. (DTN File Photo by Elizabeth Williams)

We're only week into 2019, and it's already setting up to be an interesting year. Part of the government, including many functions of USDA, are shutdown amid a partisan dispute on border security. Trade officials, including several top agricultural negotiators, are in China for discussions on how to bring an end to tariffs. While these developments certainly bear watching, there are a lot of factors that will influence the agriculture economy in the year ahead.

Late last year, Virginia Tech University professor emeritus David Kohl outlined the factors he thinks will guide the direction of the ag economy in 2019. There's no way he could have anticipated the current landscape when he made his presentation in November, but those two topics -- international trade and the results of the mid-term elections that gave Democrats control of the House of Representatives -- are already making a large impact.

Outside of the tariff issues with China, Kohl said China's Belt and Road Initiative could have a long term impact on global trade by making other countries more competitive agricultural exporters. The Belt and Road Initiative aims to improve infrastructure, trade and investment links between China and 65 countries. Here's a good resource from the World Bank on what they're doing and why. https://www.worldbank.org/…

"China was the original global trader. They want it back. And how are they doing it? They are taking a spin off our Marshall Plan after World War II to reconstruct Europe, reconstruct Asia," he told that National Agricultural Bankers Conference. "The Marshall Plan elevated our economy in the 50s and 60s. What they're doing is, looking at that plan, not only to elevate the Chinese economy, but the whole Asian economy."

China is also making large infrastructure investments in Brazil and Argentina, which could create permanent shifts in trade flows as these grain-exporting powerhouses see improvements to their supply chain.

Another trade issue to watch is the whether the U.S. Congress ultimately ratifies the United States-Mexico-Canada Agreement (USMCA), also known as the new NAFTA. The agreement has wide ranging ramifications for farm country outside of the agricultural agreements.

The U.S., Canada and Mexico account for 29% of the world's economy, Kohl said. They're also three of the world's top 10 energy producers, which could have a wide range of impacts on farm inputs, like the cost of fuel and fertilizer.

"When you start thinking about it, it's not only agriculture, but it's the whole supply chain," he said.

President Trump has threatened to withdraw from the old NAFTA agreement before Congress votes on the new one, hoping it pressures Congress to ratify the pact. That's far from a certain outcome with Democrats now in control of the House.

A slowing global economy could also make 2019 a tough row to hoe for U.S. farmers. Stories about China's slowing economy are beginning to percolate, as are concerns that the European economy could take a big hit if there's no agreement on trade before the Brexit breakup.

"When you look at the United States, we are the strongest economy currently around the world," Kohl said. "We export $1 in $5 of net farm income, that global economy, and the health of the global economy is very, very important."

On the domestic front, 2019 could be a pivotal year for farmland values.

"One of the major reasons your farmland values have not collapsed is because the land is owned by baby boomer farmers who are late in their farm cycle. That presents a great bridge," he said. Farmer that use that equity to reinvent or readjust their businesses could come out on top despite overall economic challenges, while farmers that use it to refinance could face a tougher road ahead.

"Every time you do a refinance, you take that producer out toward the end of the pier, and at the end of the pier, that water's deeper," Kohl said. "So with this great bridge, we've got to make sure we're using it as an advantage."

Kohl is also worried about mounting supplies of protein, which's he calls the "great wall of protein." As tariffs continue to impede sales to America's largest pork buyers -- China and Mexico -- supplies of red meat, chicken and dairy products have filled America's cold storage system to the brink. Many hog producers are cutting back on their output, and new slaughter facilities are running at far lower capacity than expected when they broke ground.

Grain farmers need to be concerned if the livestock industry goes through a major adjustment to lower prices. U.S. feed grain supplies are large, and it'll take a healthy livestock industry to eat through them.

Kohl is also concerned about the health of the general U.S. economy. When he spoke in November, stocks were near all-time highs and the economy was on a 112-month winning streak. In his words, the economy was getting "long in the tooth."

The Federal Reserve got its share of blame in the market shellacking that took place in December after it raised benchmark interest rates 25 basis points for the fourth time in 2018. I highly recommend reading DTN editor emeritus Urban Lehner's blog "Whither Interest Rates as the Stock Market Duels the Fed" for perspective on why that happened even though it maybe shouldn't have. You can find it here: https://www.dtnpf.com/…

Fed Chairman Jay Powell has sought to reassure the markets in the New Year, stressing that future decision will be data dependent. Either way, Kohl argues interest rates are a double-edged sword for agriculture. "They not only increases your costs, but it strengthens the dollar. So, it hits exports, but it also increases the costs of doing business." In the current environment, neither of these things are good for farmers.

While interest rates are rising to reflect the strength of the overall economy, Kohl argues the economy has an Achilles' Heel that no one is talking about: debt.

The national debt hit a new high at the end of 2018, and currently sits just shy of $22 trillion. You can check out a running tally here: http://www.usdebtclock.org/…

"The cost of debt goes up as interest rates increase," Kohl said, adding that it's an issue the government needs to address otherwise "we'll monetize ourselves into oblivion."

With only a week of 2019 under our belts, many of Kohl's factors to watch have already come to fruition or proven their worthiness. Only 349 days to go.

Katie Dehlinger can be reached at Katie.dehlinger@dtn.com

Follow her on Twitter @KatieD_DTN

(KD)

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