December 24, 2018

TOP AG ISSUES FOR 2018

At the end of every year, various publications, websites, etc. have their “Top 10” or “Top 5” list for that year. We have prepared a “Focus on Ag Top 4 Ag Issues” list for 2018, based on the key issues that were discussed in the columns throughout the year. Following are the “Focus on Ag” Top 4 ag issues for 2018:

• The ongoing trade disputes with China, Canada and Mexico.

During 2018, the United States experienced declining trade relations with several nations, reaching a point of what many economists referred to as an all-out “trade war”. The so-called trade war is being played out on many fronts, with the most highly publicized being the added tariffs that were imposed by the U.S. and China in early July on goods being traded between the two countries. However, there were also been new tariffs added on goods traded with Canada and Mexico, the partners with the U.S. in the North American Free Trade Agreement (NAFTA). China, Canada and Mexico account for approximately 44 percent of all U.S. ag exports on an annual basis. Recently, USDA announced that the second half of the “Market Facilitation Program” (MFP) payments will be made to eligible producers to offset income losses resulting from the tariffs that were implemented on U.S. ag exports.

In many instances when we listen to the national media, we think of trade policy and tariffs being played out by Presidents and government leaders, and only having an economic effect at a “macro level” on a national basis. In reality, the impacts of tariffs and declining trade relations are more likely to affect individual farmers and businesses that rely on export markets to sustain their businesses. The negative profit margins can force some farms and businesses to reduce or discontinue their operations. These policies also have a major impact on individuals who work in industries that support those farms and businesses, and the families and communities that depend on this economic base.

China only recently announced the first U.S. soybean purchases since the trade war began back in June. It may take months or even years for U.S. ag trade with China to return to pre-trade war levels, if the U.S. ag exports return to that level at all. China continues to have a 25 percent (25%) tariff on U.S. soybeans and other ag products that are imported into the country. The new United States-Mexico-Canada trade agreement (USMCA) has been initiated to replace NAFTA and was signed a few weeks ago by the leaders of the three countries. However, the USMCA agreement still needs to be approved within the various countries, including by the U.S. Congress, before being implemented. In the meantime, the tariffs that Mexico and Canada placed on U.S. ag products being imported into the two countries have remained in place.

• Weather issues and reduced crop yields in some areas.

“Mother nature” was not kind to many producers in southern Minnesota and northern Iowa in 2018, as well as in some other areas of the Upper Midwest. Several areas received 50-100% above the normal growing season rainfall, in addition to some severe storms late in growing season, which lead to greatly reduced crop yields for the year. Some growers in south central and southwest Minnesota and adjoining areas of northern Iowa are reporting their lowest corn yield since the disaster year of 1993. Overall, corn yields in region were 10-20 percent below long-term averages, and probably 15-30 percent lower than 2015-2017 average yields. In general, soybean yields were 5-20 percent below long-term average yields. Based on the December USDA Report, Minnesota is projected to have a 2018 corn yield of 184 bushels per acre and a soybean yield of 50 bushels per acre. USDA is estimating the 2018 Iowa corn yield at 198 bushels per acre and soybean yield at 58 bushels per acre.

By comparison, growers in Illinois, Indiana, and the eastern Corn Belt experienced record crop yields in 2018. Portions of southeast, central, and northwest Minnesota, as well as central and eastern areas of Iowa, also reported above average yields, as did parts of Nebraska, North and South Dakota. At a farm-level price of $3.25 per bushel, a farm operator with a yield of 220 bushels per acre will gross $715 per acre, while a producer with 180 bushels per acre grosses $585 per acre, and a producer with 140 bushels per acre only grosses $455 per acre. Producers with significant crop losses that carried 80 or 85 percent crop insurance coverage for 2018 were likely able to mitigate a portion of the 2018 lost income.

• Tight cash flow margins and the declining farm economy.

Based on Farm Business Management (FBM) averages of 1,420 farms in Southern and Western Minnesota, the average net farm income for 2017 was $54,241, which was slightly above the 2015 and 2016 average net farm incomes; however, 2017 was still lower than the average net farm income level for the past decade. Net returns in 2017 varied among commodities. For example, the average net return above direct and overhead costs on cash rented corn acreage was a negative ($36) per acre, while average returns on cash rented soybean acres was positive by almost $14 per acre. 2017 net farm incomes were bolstered by above average crop yields for the year in most areas.

Net farm income levels for 2018 are likely to decline in many portions of the region, due to reduced crop yields and lower grain prices in the second half of the year. The level of crop insurance carried by farm operators for the 2018 crop year, along with grain marketing decisions that were made, will likely have a significant impact on profitability for individual farm businesses. Profitability in livestock production also decreased in most segments of the livestock industry in 2018, primarily due to lower market prices that resulted from increasing supplies of products and the ongoing trade disputes that affected export markets.

• Passage of a New Farm Bill.

The new Farm Bill, titled the “Agriculture Improvement Act of 2018”, has now been signed into law. The Farm Bill will include provisions for the twelve Titles that are included in the legislation. The new Farm Bill will govern USDA programs from 2019 to 2023 and will be very similar to the current legislation, outside of a few tweaks to the commodity and conservation titles. The commodity provisions of the new Farm Bill will be implemented for the 2019 crop production year.

Producers will have a choice between the price-only “Price Loss Coverage” (PLC) and county yield revenue-based “Ag Risk Coverage” (ARC-CO) program choices for the 2019 and 2020 crop production years. Beginning with the 2021 crop year, producers will be able to make an annual election between the ARC-CO and PLC program choices. Farm operators will also have the opportunity to update the farm-level program yields for the PLC program beginning in 2020, with updates based on 2013-2017 yields.

Kent Thiesse has prepared an information sheet on some of the provisions in the Commodity and Conservation Titles of the new Farm Bill. To receive a copy of this information sheet, send an e-mail to: kent.thiesse@minnstarbank.com

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Note — For additional information contact Kent Thiesse, Farm Management Analyst and Senior

Vice President, MinnStar Bank, Lake Crystal, MN. (Phone — (507) 381-7960);

E-mail — kent.thiesse@minnstarbank.com)