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Cost control, preservation of capital important for farmers

 

By MICHELE F. MIHALJEVICH

WEST LAFAYETTE, Ind. — The U.S. agricultural economy may have a tough time keeping up with what are expected to be healthy foreign and domestic economies in 2018, according to a longtime Purdue University professor.

“The contrast is such a robust U.S. and world economy, while at the same time we have an agricultural economy that is struggling in terms of farm income,” said Chris Hurt, a professor of agricultural economics. “I think everybody knows the agricultural economy, from a farm income standpoint, is depressed. That’s not going to turn around substantially in at least the first half or first three-quarters of 2018.”

The overall U.S. economy will be bolstered by strong employment numbers, the recently passed tax reform legislation, improved wages and growth in housing values, he noted. These factors indicate a “good picture, a positive picture, for the general economy and for our consumers. We are hopeful that will help provide at least a little bit of support for the agricultural community,” he said.

Hurt and two of his colleagues discussed the 2018 agricultural economic outlook and farm business strategies during a Jan. 5 webinar from the university’s Center for Commercial Agriculture.

It may take producers some time to understand how changes in tax laws might affect them, said Jim Mintert, the center’s director.

“It’s going to take a little while for people to figure out where they’re at with respect to this tax bill,” he explained. “But as 2018 unfolds, people will become more aware, and that’s when that impact is likely to kick in.”

Foreign and domestic consumers with increased incomes tend to buy more, including some agricultural goods, Hurt said. “From a demand standpoint and from an income standpoint, it doesn’t get much better than this year,” he added.

The strong domestic and global economies could spark increases in inflation and interest rates, which could be a mixed blessing for agriculture, Hurt said. Interest rates would be a negative, but inflation could be a positive for the agricultural economy.

“If we do see the movement toward inflation, the guess is you’re going to see more investment in commodities as an inflationary hedge,” he explained. “That would bring commodity values up, and probably that would include the grains.”

He predicted average marketing year corn prices would be $3.70 a bushel in 2018, $3.90 in 2019 and $4 in 2020. For soybeans, he projected $9.55 for 2018 and 2019, and $9.45 in 2020. Hurt is expecting average wheat prices of $4.20 in 2018, $4.80 in 2019 and $5 in 2020.

With those projected prices, farmers should be able to cover variable costs such as fertilizer, seed and fuel, said Michael Langemeier, also a professor of agricultural economics. Break-even prices for all costs for rotation corn in Indiana in 2018 range from $4.02 (high-quality land) to $4.88 (low-quality) per bushel. For soybeans, the range is $10.25 (high-quality) to $12.33 (low-quality).

“It’s going to be difficult on the low and average land to cover all of the costs, so you’ll have very low returns for machinery ownership, for land ownership, for labor,” he said. “It’s a very tight situation, particularly for low and average (land).”

U.S production of beef, pork and poultry is expected to increase 2-3 percent in 2018 over last year, continuing a trend that began in 2015.

“As consumers, especially in importing countries, see their incomes grow, one of the things they like to do is continue to change their diets, improve their diets, by consuming more animal protein,” Mintert noted. “I think that’s very positive for meat exports over the next few years if we continue to see that positive income growth.”

When considering a management philosophy for 2018, farmers should think about tight margins, cost control and preservation of capital, he said. They should also think about getting through the year.

“We’ve painted this scenario that suggests we think there are prospects for better returns, better margins, after 2018. So, make sure you are in position to take advantage of that as 2019 and 2020 roll around.”

1/17/2018