Bank of the West US Outlook Report for March 11, 2016

US Outlook Report: Agricultural Outlook Remains Challenging

The outlook for American agriculture has steadily deteriorated since 2013. While not a disaster, the economic and financial pain is beginning to show. Net farm incomes were at their highest levels on record in 2013, riding the wave of rising agricultural prices and robust demand from abroad. From a peak of $123.3 billion in 2013, net farm income is estimated to have been cut in half to $56.4 billion in 2015, according to the U.S. Department of Agriculture. And the outlook is that net farm income could slump another 2.8% to $54.8 billion for all of 2016, a $68.5 billion or 56% decline from the 2013 peak.

At the same time total farm debt is expected to rise to $372.5 billion this year. That is an increase of $78 billion, or 26.5%, over the past five years. Following periods when farm incomes are strong, farmers tend to plow their profits back into investments in farm land and equipment. It doesn’t take a Ph.D. in Economics to conclude that rising debt in a period of slumping incomes is not a healthy financial path to be on for too long.

Behind the drop in farm incomes, of course, are the steep declines in nearly all agricultural prices over the last two years, and strong competition and weaker demand from abroad. The U.S. dollar index has strengthened approximately 22% since 2014, while major agriculture trading partner currencies from the Mexican peso, Canadian dollar, Brazilian real, and Argentine peso have all slumped, giving their agricultural imports into the U.S. a competitive price advantage over U.S. growers.

U.S. agricultural exports are expected to drop another 10.5% in 2016 to $125 billion from $139.7 billion in 2015, according to US Department of Agriculture forecasts. U.S. agricultural exports have slumped a whopping 17.9% since their 2014 peak.

Further large declines are expected in 2016 in U.S. exports of grains and feeds, oilseeds and products, livestock, poultry, dairy, and cotton. On a somewhat better path, exports of fruits and vegetables, tree nuts, and sugar are expected to be near 2015 levels.

Geographically, where is the financial hit the greatest from these deteriorating agricultural industry fundamentals?

Agricultural industry exposure is high in states like California, Iowa, Texas, Nebraska, and Minnesota. California alone generated $55.5 billion in gross farm receipts in 2014 comprising 12.0% of the national total. Together the top ten states comprise nearly 54% of U.S. total farm receipts. In other words, the negative economic impacts across the nation can be expected to be geographically concentrated – literally pockets of woe.

Farm real estate prices skyrocketed along with rising farm incomes, but now that trend is in full reverse. Through 2015, nine states were already seeing year-on-year declines in farm real estate values, and ten states were seeing declines in crop land values. The biggest percentage point drops are found in the Midwest. Iowa farm real estate values dropped 5.9% last year. Declines are also occurring in Minnesota, Illinois, Nebraska, Kansas, New Mexico, Georgia, North Carolina, and Pennsylvania. U.S. agriculture will remain an important source of long-term growth and exports for large areas of the country, but it is hard to ignore the near-term change in the weather for this sector.

To find out more, check out this week’s U.S. Outlook Report.