WPI Spotlight

  • August 24, 2017
    During his presidential campaign, candidate Donald Trump often characterized the 23-year-old North American Free... NAFTA Renegotiation Begins
  • June 20, 2017
    Farmers in India want the Swaminathan Report recommendations implemented, including the suggestion that Minimum... Loan Waivers and MSP Issues in India

News

Current Analysis

USDA's Economic Research Service recently released its farm financial analysis that includes assets, debt and equity forecast to the end of 2013. It's a timely report given the drop in crop prices, the unclear status of the farm bill and its support programs as well as the uncertainty of the renewable fuel standard (RFS) going forward into 2014 and 2015. The biggest factors are net farm income and debt levels.

Income
Net farm income is forecast to be $131 billion in 2013, up 15.1 percent from 2012's estimate of $113.8 billion. After adjusting for inflation, 2013's net farm income is expected to be the highest since 1973. Substantial year-end crop inventories are expected as a result of the record corn harvest. Net cash income, which measures the difference between cash expenses and the combination of commodities sold during the calendar year plus other sources of farm income, is forecast at $129.7 billion. That is down just over 3 percent from 2012. In spite of this and after adjusting for inflation, 2013's forecast would be the fourth time that net cash income has exceeded $100 billion since 1973.

Debt
Farm debt is broken down into real estate debt and non-real estate debt. Real estate debt for 2013 is projected to be $180.2 billion, 4.2 percent above the estimate of outstanding real estate debt at the end of 2012. Cheap interest rates have helped prop up farm real estate prices and high crop prices have helped keep land prices elevated. Additionally, increased crop prices have kept income high. That enables larger down payments and less debt financing. The Farm Credit System is the largest lender to farm real estate debt with commercial banks in second place.

Non-real estate debt (operating loans, machinery and buildings) is forecast to be $130 billion in 2013, up 2.1 percent from 2012. Higher input prices for feed, especially in the livestock sector, have increased the size of the average loan as opposed to more loans expanding this type of borrowing. Commercial banks are the largest lender when it comes to non-real estate debt.

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Assets
Farm assets are up, pushed largely by increased land prices that have increased 7.5 percent. Livestock herds and flocks are down by about 1 percent, and cash assets will decrease by as much as 10 percent this year with year-end grain prices down. That will start to have an impact on land prices and borrowing.

The bottom line is that farm income has lifted up farm assets and equity. As expected, farm debt to equity and debt to assets are down. We could see a turning point in 2014. Lower income and asset values will soon come into play as will bearish crop prices and the ability to invest larger down payments. Indeed, smaller down payments will mean more borrowing.

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J.P. Morgan Chase has agreed to pay a fine related to the activities of one of its derivative trading desks in London during the early months of 2012. The formal complaint against the bank pertained to its trading in a derivative index known as IG.9 that was tied to high grade North American corporate bonds. The individual managing J.P. Morgan's trading activities in this market became famously known as the "London Whale" due to his style of trading big orders and big positions.

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In August, WPI's Gary Blumenthal and David Gregg trekked through the Illinois countryside and took in this year's corn crop on contributor John Robinson's farm.

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Corn, Weather and the Market

Recall that the bearish 28 June Acre report caused a sharp sell-off in the December corn contract; down to about $4.90 per bushel. End-users found that to be an attractive price level prior to pollination and various speculators also perceived a temporary opportunity. Consequently, this combination of buyers drove prices back up to about $5.25 per bushel which was an area of technical resistance. As this price action was transpiring, improving weather forecasts made it increasingly evident that the U.S. corn crop would not be threatened by adverse conditions during pollination and the prospects increased that the $5.00 per bushel level would again be penetrated.

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Northeast Interstate Dairy Compact History

Clients may recall the disruptive regional dairy policy known as the Northeast Interstate Dairy Compact (NEIDC) which was in place from 1996- 2002. If not, a quick primer follows:

The NEIDC empowered an appointed commission – made up of state bureaucrats and dairymen - to effectively set the minimum farm gate price that bottlers must pay for fluid milk. It was intended to be a temporary measure to tide over dairy farmers in the six New England states until a more comprehensive national dairy policy reform – unachievable during the 1996 farm bill debate - was crafted. In all, it cost consumers in the northeast at least $130 million in higher retail milk prices before it expired in 2002. Though the New England states comprised only 3 percent of dairy production at the time, the price-setting power even applied to milk entering from states outside the compact, such as major dairy producers New York and Pennsylvania.

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Kennedy, Agriculture and Agricultural Policy

Later this year, on 22 November to be precise, the 50th anniversary of the assassination of President John F. Kennedy will be remembered. On that date in 1963 President Kennedy was shot and killed by Lee Harvey Oswald in Dallas, Texas. It was one of those instances of great national trauma. Those of us who were around at that time can still well remember exactly where we were and what we were doing when we first heard the tragic news. The 50th anniversary of President Kennedy's death will no doubt revive discussion of his life and his presidency although that discussion has really never gone away.

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WPI Spotlight

  • August 24, 2017
    During his presidential campaign, candidate Donald Trump often characterized the 23-year-old North American Free... NAFTA Renegotiation Begins
  • June 20, 2017
    Farmers in India want the Swaminathan Report recommendations implemented, including the suggestion that Minimum... Loan Waivers and MSP Issues in India