A string of years featuring low crop prices and persistently elevated input costs has led to weakness in the farm sector, with the recent downturn in livestock as an additional factor, says the Kansas City Federal Reserve Bank.
“The U.S. agricultural economy has continued to weaken in the first quarter of 2016 and is expected to remain soft through the year,” said assistant vice president Nathan Kauffman of the Kansas City Fed in an update. “The weakening has been gradual over the past few years but it has been persistent and has intensified in recent months amid mounting financial stress for some agricultural producers.”
Farm income in the Kansas City Fed’s district covering the central Plains and Rocky Mountain states has been on the decline since mid-2013. In a survey by the regional Fed, four out of five ag bankers said they expected income to fall during the first quarter of this year: “The need for financing, and the potential for future financial stress, has continued to increase throughout U.S. farm country.” Besides seeking bank loans, farmers are turning to the USDA for short-term operating loans to mitigate the risk of low revenue from crops and livestock.
“Pessimism about cash flows and profit margins appears to be the main factor driving the weak outlook in the agricultural economy,” said the regional Fed.
Noting the bleak sentiment in farm country because of low commodity prices, Indiana economists David Widmar and Brent Gloy said “there are some positive signs” for the agricultural sector. Among them are lower fertilizer, fuel and land rental rates, sustained low interest rates, a low inflation rate and stabilizing farm income albeit down sharply form 2013. “In our opinion the most important positive trend is that the cost of production is heading lower for many producers,” wrote Widmar and Gloy at the blog Agricultural Economic Insights.
With lower costs, “the price recovery necessary to restore profitability is not as large as would have been required in the previous two years,” said the economist. “We may not get there, but the improved cost structure is a good sign for the future.”