Farm Economy Outlook Worsens

The outlook for the farm economy continued to worsen this year, despite some occasional rebounds in income and profit margins, said Nathan Kauffman, assistant vice president of the Kansas City Federal Reserve Bank, in an analysis.

“As 2016 winds down, there will be increasing focus on the outlook for 2017 and likely more questions about the ability of some producers to continue to operate after experiencing losses for multiple consecutive years,” Kauffman said.  Many relied more heavily on short-term financing and restructured debt to get through 2016, but if the outlook for cash flow remains poor during the next loan-renewal season, some producers may need to consider more aggressive alternatives to shore up depleted working capital.

 

FARM INCOME

 

In August, the USDA revised expectations for 2016 farm income up modestly from the February forecast, he said, but income still was expected to decline notably from 2015.  The August revision can be interpreted as positive and negative for farmers.

On the positive side, farm income expectations for 2015 and 2016 were revised up by 43% and 31%, respectively.

On the negative side, the expected decline in farm income from 2015 to 2016 widened to 11% in the most recent report from 3% earlier in the year.  Essentially, farm income was higher than initially forecast, but the deterioration from a year ago now is believed to be sharper than expected.

The improvement in farm income expectations was largely because of downward revisions in production costs even while revenue expectations continued to weaken.  Cash receipts for crops generally were expected to remain unchanged in February, but the August revision pointed to a decline of about 4% from a year ago.

Similarly, the August report predicted a 10% drop in cash livestock receipts from a year ago, slightly more than expected in February. Production costs for this year, however, also were revised lower and more than offset the more pessimistic outlook for revenue.

Total production expenses in the farm sector were anticipated to be more than 7% less than expected earlier in the year, with much of this adjustment coming from a reduction in capital outlays.

 

PROFIT MARGINS

 

Although farm income expectations were revised upward in August, profit margins for many grain and soybean producers weakened significantly in the third quarter, Kauffman said.

The range of average monthly crop prices thus far in 2016 has left very few opportunities for producers to sell at a profit.  Since 2013, profit margins have dropped precipitously for corn, soybeans, wheat, and cotton, and wheat and corn prices were hovering at or near 10-year lows in September.

Profit margins in the livestock sector have also dropped sharply over the past few years, he said.  For cattle producers, feedlot losses persisted in 2016, following extreme losses toward the end of 2015.

Among the major livestock markets, only hog profit margins generally have been positive in 2016, although prices were near breakeven toward the end of the third quarter.

 

CASH CATTLE MARKETS LOWER

 

Cash cattle markets Thursday were quiet after trading Wednesday $2 to $3 lower at $103 to mostly $104 per cwt on a live basis and at $162 to mostly $163 dressed.  Further trading was expected at similar prices through Friday.

The USDA’s choice cutout Thursday was $0.98 per cwt lower at $189.77, while select was off $1.00 at $178.94.  The choice/select spread widened to $10.83 from $10.81 with 96 loads of fabricated product sold into the spot market.

The CME Feeder Cattle Index for the seven days ended Wednesday was $134.88 per cwt, down $1.80.  This compares with the Sep settlement Thursday of $134.22, down $0.95, and the Oct settlement of $127.50, down $0.52.