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Are we Mooo-ving in the right direction?

Posted on March 26, 2019 Published by

As a boy, I grew up on a small hobby farm in Michigan. As it turned out, I did not have what it takes to be a good farmer. Even with everything I learned, including the skills necessary to be a farmer, the markets and mother nature could always undo my best efforts. So, now I take what little I do know about farming and compile information from people that know a lot more about the agriculture industry than I do.

Before getting into the outlook for the Agricultural Industry for 2019, it’s important to consider the significance of the industry to our primary market area of Wisconsin. Wisconsin agriculture includes 68,700 farms incorporating 14.4 million acres. It contributes $88.3 billion to the state’s economy and employs 413,000 people, or 11% of the state’s employment. The top 10 ag commodities based upon 2017 cash receipts are as follows:

  1. Dairy Products – Includes 1.28 million dairy cows generating over $5 billion in cash receipts with production levels of 1,830 pounds (213 gallons) of milk per month. Number 2 in US milk production and milk cows
  2. Cattle/Calves – 285,000 beef cattle generating $1.6 billion in cash receipts
  3. Corn – 4.05 million acres under production generating 573,000 bushels. Cash receipts of $1.3 billion
  4. Soybeans – 2.14 million acres generating $987.4 million in cash receipts
  5. Potatoes – 3rd in US potato production. $283.2 in cash receipts
  6. Cranberries – Wisconsin’s number 1 fruit crop and top producing state in the country. $177.3 million in cash receipts
  7. Broilers – 54 million broilers generating $108.6 million in cash receipts
  8. Hogs – $98.8 million in cash receipts
  9. Hay – 2.19 million acres under production. The harvested value in 2017 was $816.2 million with most fed to own livestock. Sold 10% of the crop with cash receipts of $84.4 million
  10. Chicken eggs – 1.8 billion eggs generating $79.1 million in cash receipts

The National Agriculture Statistics Service (NASS) of the USDA compiles key statistics on the agricultural industry. In the February 2019 report, the service reported key financial indices that provided some insight into 2019 projections. Among other factors, the NASS looked at prices received by farmers compared to a baseline of 2011.

  • For feed grain, January 2019 was at 59.4 %, up 0.3% from year end 2018 and 7.6% from a year ago.
  • Corn prices were running $3.56/bu, up $.02 from year end but $.27 from a year ago.
  • Livestock production was at 97.9% and up 6.4% from year end, and 3.6% from a year ago.
  • Compared to a year ago, prices were up for broilers, milk, cattle and turkeys while down for hogs, eggs and calves. Total production expenses remain relatively unchanged compared to year ago (up 0.6%) but when adjusted for inflation are down 1.1%.
  • Dairy came in at 82.6% and up 1.2% from year end and 3.1% from a year ago.
  • January milk was at $16.6 per cwt, up $4.00 from the previous month and $1.00 from a year ago.

Overall, the ratio of prices received to prices paid decreased in January to 78% compared to 82% at year end and 80% in January 2018. However, the livestock index was more favorable at 97.9% because of higher prices for broilers, cattle, milk and hogs.

Are we Mooo-ving in the right direction?

The Economic Research Service (ERS) of the USDA is projecting net farm income to increase $6.3 billion (10%) to $69.4 billion after a decrease of $12 billion (16%) in 2018. Overall cash receipts are expected to increase $8.6 billion (2.3%) in 2019. $7.3 billion of the increase comes from commodity price increases with $0.8 billion from increased quantity and $0.5 billion other. Of the total cash receipt increase, $4.6 billion is expected in animal and animal products (milk, cattle/calves) corn, and fruits and $4.0 billion crop receipts. However, it is worth noting that even with the overall increase in cash receipts, net farm income is expected to be below the historical average of $90 billion for the period of 2000 to 2017.

While all of this seems fascinating, as bankers and lending professionals it is really income at the farm level that repays our loans. Farm businesses (as defined by ERS) are farms with gross cash farm income over $350,000 or a smaller number if the primary occupation reported is farming. These farm businesses account for over ½ of all U.S. farms, but constitute 90% of the farm sector’s value of production and hold a majority of assets and debt. Average net cash farm income (NCFI) for 2019 is forecast at $75,000, which is up 9.3% from 2018. This is the first annual increase after 4 consecutive years of decline. The increase is expected to be broad both in terms of farming regions and most commodity specializations. The following charts summarize key changes from 2018 to 2019:

CROP PRODUCTION

Specialty                                 Avg NCFI                                   % change

Corn                                           $150,900                                6.6

Soybeans                                $101,100                                6.0

Specialty crops*                $187,700                                7.3

*Specialty crops include fruit & tree nuts, vegetables and greenhouses

 

ANIMALS/ANIMAL PRODUCTS

Specialty                                 Avg NCFI                                   % change

Cattle/Calves                      $23,200                                   19.0

Hogs                                           $208,900                                (4.0)

Poultry                                     $90,300                                   0.7

Dairy                                          $186,800                                35.1

 

Although regional performance can vary because of certain specialties, all 9 of the ERS regions are expected to see gains. Locally, Wisconsin, Minnesota and Michigan are included in the Northern Crescent Region and expected increase in NCFI is 15% for 2019 over 2018.

After several consecutive years of pain in the agricultural sector due to low commodity prices, it appears that 2019 offers some reason for optimism. One could say you can almost smell that dairy-air.

 

Richard Rudolph is Senior Consultant at Enlighten Financial, a specialized consulting firm that focuses on loan review and risk management services to community banks and credit unions. Enlighten Financial has made it our business to shed light on the complex financial landscape, and lead clients in the right direction. We work with financial institutions and other providers to mitigate risk. To talk to Rick directly, please call: 920.264.9150.

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“By questioning some of our methodologies, Enlighten has helped us say, ‘Okay, this is where we need to train staff better and focus on so that they understand what they're doing better.”
— Robert McPherson, VP of Risk Management, Peoples State Bank
“The organization of the communication — before, during, and after the reporting process — was certainly better with Enlighten than what I've experienced with a lot of auditors.”
— Bill Beardsley, President, Michigan Business Connection
“The staff at Enlighten have been available for questions, in addition to the engaged work that they do. They've been very helpful as a resource beyond the major audit.”
— Meghann Kasper, Chief Credit Officer, Bank First
“Enlighten gives us a very good second set of eyes on our transactions. They're not afraid to challenge us on some of the work that we've done, which is what is needed. I don't need to pay somebody to tell me I'm good, I need to pay somebody to tell me where I've made mistakes.”
— Robert McPherson, VP of Risk Management, Peoples State Bank
“Enlighten provided industry best practices that weren’t going to show up in an audit report. They would say, ‘Hey, I noticed you do this. This is really unique, you do a really great job of it.’ And then they might add, ‘Some other clients that I have are doing something like this.’”
— Bill Beardsley, President, Michigan Business Connection
“By questioning some of our methodologies, Enlighten has helped us say, ‘Okay, this is where we need to train staff better and focus on so that they understand what they're doing better.”
— Robert McPherson, VP of Risk Management, Peoples State Bank
“The organization of the communication — before, during, and after the reporting process — was certainly better with Enlighten than what I've experienced with a lot of auditors."
— Bill Beardsley, President, Michigan Business Connection