The past five years, since the collapse of the commodity boom, “has resulted in a massive drain of farm sector liquidity” and working capital is critically low, said economist Brent Gloy on Monday. The new round of up to $14.5 billion in trade mitigation payments promised by President Trump may improve the financial picture for some producers.
“The (trade)payments are of a magnitude that they can move the needle on financial conditions but they will clearly not rebuild working capital to the levels that are necessary for long-term financial stability,” said Gloy at the Agricultural Economic Insights blog. “Given the level of working capital in the sector, one would expect/hope that the payments may be heavily front-end weighted.”
Trump suggested two weeks ago that USDA would distribute the bulk of the money this summer. Since then, questions arose if USDA has the resources at the moment for a mammoth disbursement.
Farm sector working capital is an estimated $38 billion this year, the lowest since 2009 when USDA began providing the figure. It was roughly $60 billion in last year and $72 billion in 2017. Working capital is calculated by subtracting current debts from current assets.
The USDA forecasts a modest improvement in net farm income this year but it would be still roughly half of the record set in 2013 at the peak of the commodity boom.
Commodity prices have strengthened recently on the expectation that planting delays will mean smaller U.S. crops. “Perhaps the combination of higher commodity prices and MFP payments will improve the financial situation in agriculture. What would help even more is a resolution to the trade war and resumption of trade with one of the ag sector’s biggest customers,” said Gloy, referring to China.