Weak commodity prices create issues for ag producers

'A long row to hoe': Oklahoma farmers grapple with challenging times

No two farming slumps are exactly alike.

But challenges faced by today’s farmer look a lot like the ones they faced in the 1980s.

Commodity prices remain weak — a trend seen the past six years — as surplus crop supplies and artificial trade barriers weigh upon marketing opportunities for the industry.

In the 1980s, a U.S. trade embargo affecting exports to Russia was a major barrier to global wheat markets for farmers.

This time, the nation’s participation in global agriculture markets for wheat and other crops has been substantially disrupted since 2017 while President Trump’s administration and Congress work their way through renegotiating various deals.

Plus, an increase in the global production of commodities since the end of World War II hasn’t helped.

Inflation-adjusted prices for wheat, corn and soybeans are below what the nation’s farmers earned for those crops in 1940.

And like in the 1980s, oil and gas revenues are down as well.

Consequently, farmers are hurting.

The U.S. Department of Agriculture’s Economic Research Service forecasts the nation’s farms will earn a net income of $92.5 billion this year, 25% lower than what they earned in 2013.

In the early 1980s, farm net income bottomed out around $40 billion, before spending the next decade slowly recovered, the service’s data shows.

Farm sector debt nationally climbed above $400 billion in 2016, marking the first time it had reached that level since 1985.

The total debt for 2019, which includes both real-estate backed and nonreal-estate backed loans, is forecast to reach $415.5 billion.

“It is like a slow-drip water torture,” said Rodd Moesel, president of the Oklahoma Farm Bureau.

“It isn’t unusual for farmers in our part of the country to have a bad year every now and then,” he said. “But we are into five years in a row that commodity pricing has been about half of what it was before.

“People can’t replace their equipment, they are using up the savings they had and they are dipping into their borrowing capacity, if they still have it.

“I am meeting more and more young farmers who are highly leveraged who are having to sell parts of their farms to keep the rest,” Moesel said. “It is not a pretty picture at the moment.”

Finances weaken

A third-quarter 2019 agriculture credit survey by the Federal Reserve Bank of Kansas City shows bankers are reporting crop production and trade concerns continue to weigh upon farm credit conditions across much of the Great Plains.

The survey, conducted with bankers who work with farmers and ranchers across Colorado, Kansas, Nebraska, Oklahoma, Wyoming, western Missouri and northern New Mexico, indicates they observed lower farm incomes during the period, year-over-year, despite slightly higher crop prices and support from trade relief payments.

It attributes that decline in part to a sharp price decline for cattle caused by a summer fire at a major beef processing facility in Kansas.

During the quarter, farm borrowers made additional cuts to spending, particularly to support their businesses.

Household spending fell as well, and bankers indicated they expected that trend to continue.

Most bankers reported seeing a modest deterioration of the availability of working capital for farmers.

However, the bankers said that trend wasn’t as bad as it had been in the previous three years.

Because of the overall deterioration of farm finances, about half of the responding bankers reported they expected at least 5% of their borrowers would sell some of their assets before the end of 2019.

“For a farmer to sell land, that usually goes against every grain they have got,” Moesel said.

“Since farm commodity prices are so down and we don't know when the trade war with China will end, there is uncertainty in the farm sector,” one banker from southwestern Oklahoma who participated in the survey remarked.

“Cattle prices are below breakeven for some producers, and that is an issue,” another participating banker from southeastern Oklahoma added.

There is a positive difference between 40 years ago and today, though.

“Farm values have been relatively stable,” said Cortney Cowley, an economist with the Federal Reserve Bank of Kansas City. “In the 1980s, a steep decline in land values then was kind of the last shoe to drop that really caused kind of a significant recession.

“This time around, farmland values are providing ongoing support for the sector. So not only have we seen solvency ratios remain more steady this time, it is helping to hold everything up,” she said.

Oklahoma specifics

Data gathered once every five years that provides a good snapshot of farming operations in Oklahoma was released by the USDA’s National Agricultural Statistical Service earlier this year.

The data shows about 78,500 farms in Oklahoma in 2017 generated product valued at nearly $7.5 billion.

A comparison of 2017 data with 2012 data showed the number of Oklahoma farms that were between 1 and 9 acres in size increased by more than 1,000 over that time, while the number of farms between 10 and 49 acres increased by more than 2,000.

Numbers of other farms between 50 and 999 acres declined over that time, while a slight increase in larger farms was observed.

The total number of Oklahoma farms declined slightly, from about 80,000 in 2012 to the 2017 number.

As for Oklahoma farmers, they are a little bit different from those in the corn belt because many are supported by supplemental income they make from oil and gas production, John Grunewald, CEO of Farm Credit of Western Oklahoma, observed.

“But there has been a decline in that too, which is impacting their balance sheets and income statements,” Grunewald said.

The Farm Bureau’s Moesel said farmers are telling him they continue to work toward bringing family back to farms to keep their operations going.

“I know dozens of farmers who have raised super-bright kids with hopes that one or more of them would return home to the farm,” he said.

“Farms are a great place to raise a family, and the experiences growing children get interacting with the animals and crops makes it special.

“But the real world challenge you are facing is that today there are questions about whether that can happen.

“Is there a way to have enough income to support two or more families on a place?”

A way forward

Plenty of Oklahomans working in the state’s agricultural industry remember the farm economy of the 1980s.

Hugh Aljoe, director of producer relations at the Noble Research Institute, stepped into the business to run a ranch for an international businessman after finishing college.

“Interest rates today aren’t nearly as high as they were then,” Aljoe said, “but that was about the only difference.”

Farmers today face markets where commodities surpluses and prices for those goods are little changed from what they were 40 years ago.

“If we could get some of these trade disputes settled, at least we could have cash flow, and that would help improve farmers’ margins because you could have some commerce going on,” he said.

Another difference, he noted, is farmers’ expenses are much higher today.

“Efficiencies may have improved, but they still can’t overcome the prices we have,” Aljoe said.

The quandary, he added, is causing more and more farmers to look at other ways of farming that can decrease their costs without seriously impacting production.

Conservation-friendly no-till farming that employs the use of cover crops is a method that is getting increased attention, Aljoe said.

“The market is going to be what it is. It is probably not going to change a whole lot,” he said.

“So, what else can you provide to the banker to show what the margins could be so that they will provide you a loan you can repay?”

Despite the ongoing concerns for farmers and ranchers, Aljoe, Moesel, Grunewald and Cowley expressed hope times will improve.

“Oklahoma farmers are a resilient bunch,” Grunewald said. “They will make it through this cycle, I truly believe that.”