The dairy industry seems to be sitting at something of a crossroads.
And the proof is in the puddi….er, yogurt.
Let’s talk supply: Total milk output is growing and it’s not showing signs of stopping. USDA data is pointing to 2.4% growth in daily milk output over 2020, thanks to 82,000 more milking cows all producing 1.5% more milk. The growth is even pushing the U.S. cow herd to a size it hasn’t seen in more than 30 years.
Supply is so strong that areas like Texas have more milk than processing capacity. The state’s 1.32 billion pounds of milk had it flying by New York to become the nation’s fourth-largest milk producer.
Nice timing: Demand is also surging to pre-pandemic levels. Increased traffic at foodservice, re-opened schools, and elsewhere have kept dairy farms busy. Plus, you know what else doesn’t hurt? The estimated $500 million boost in dairy exports that the USDA predicts for 2021 over 2020 levels.
But don’t forget… even while Commodity Corner has been pretty red as of late, commodity prices are still relatively red hot. Feed costs for dairy farmers continue to be a big burden of a bill. Economists expect the high costs to last well into 2022.
Where this goes: With all signs pointing to no slow in supply, the pressure will be on the demand side of the equation to find a home for all that extra milk.
Tom Vilsack is making his voice heard loud and clear: No ag sector left behind.
The USDA Pandemic Assistance for Producers initiative is coming through for producers and businesses that were left out of previous Coronavirus aid.
The ag industries that will benefit from the new support include:
- Timber harvesters
- Dairy farmers and processors
- Livestock farmers and contract growers of poultry
On that first item, the biofuels… Most of us know the pandemic put fuel demand in the tank and many ethanol plants were sidelined, despite feedstock prices being at historic highs. Now biofuel producers specifically will get some relief, with $700 million of this new boost.
Refresher: The USDA has invested more than $11 billion directly into producers and ag businesses since January. In March, $6 billion of that injection specifically helped the little guys: beginning, socially disadvantaged, and small and medium-sized producers.
And as part of the USDA “Build Back Better” program, there is also $5 billion available in the form of loans, grants and innovative financing to help improve the food system.
All that money, money, money nearly doubles the USDA’s pre-pandemic outlays. And according to USDA budget data, the price tag this fiscal year is now — brace yourselves — a whopping $289 billion.
No other way to say it; farmers are frustrated.
May’s Ag Economy Barometer plummeted 20 points as pessimistic producers weighed current and future farm economic conditions. Just 27% of surveyed growers expect ‘good times’ for U.S. ag in the next five years – the lowest in survey history.
What’s to blame: Producers expressed concern over tax uncertainties and rising input costs. Of producers surveyed:
- 83% expect capital gains tax rates to rise over the next 5 years
- 78% think proposed policies will make it harder to pass on the farm to the next generation
- 43% predict 2022 cash rental rates will jump by 10%+
Crop input prices are also likely to remain high as supply chain concerns plague everything from crop protection ingredients to the cardboard and plastic they’re stored in.
But it’s not all bad. While producer sentiment isn’t high across the board, 54% of respondents expect the crop sector to yield good results in the next five years. Crop producers also remain bullish on farmland values.
Any positive vibes row crop producers may be feeling are not necessarily shared with their dairy and livestock counterparts. Only 26% of those surveyed expect to see ‘good times’ in the animal production space in the next five years.
Where this goes: The short-term impact could be seen in machinery purchases and construction plans. While farm equipment sales are having a heyday now, producers noted less purchase intent in the coming year. And 59% of those surveyed reported lower year-over-year construction plans, including new buildings and grain bins.
You may have noticed a trend in Magnetic the past month. ‘Shortage’ – the supply chain and market-busting term – has shown up 13 times in the past 8 newsletters.
And it’s not done yet. The issue this go-around? Truck drivers.
With trucking companies already reporting significantly fewer drivers than this time last year, the future doesn’t look very bright. The American Trucking Association is predicting a shortfall of over 100,000 drivers by 2023.
And this is where the rubber meets the road: Over 70% of all goods shipped across the country are carried…you guessed it…on a truck. And the shortage is concerning many producers.
The Golden State woes. With the carrot and onion harvests in Southern California coming in fast, seasonal trucker demand is up, and companies report that they have around 30% fewer drivers than needed.
But wait, there’s more. Driver demand will be going up as summer rolls around and the tomato and nut harvests kick into high gear.
Yet, with the trucker shortage, getting the product east-bound and down may prove tricky. And more ominous consequences could be on the horizon.
According to Joe Antonini, the top dog at a Stockton-based trucking company, “crop spoilage, waste, and crops not even being able to be harvested” are potential outcomes of the summer driver shortage.
What lies ahead: California growers are hoping for a weight-limit increase to help with transport (a little) this summer. But with amped-up demand, an aging driver pool, and a host of other issues, the problem isn’t likely to hit the road anytime soon.
Talk to just about anyone connected to the ag industry today and you will see their face light up when the conversation inevitably turns to commodity prices. After all, higher commodity prices are good for everyone…
Minus one audience: bankers.
Farm lending has been on the slow track for a while now, and that train kept rolling into the first quarter of 2021.
Not exactly welcome news if you’re the one with money to lend.
The Kansas City Federal Reserve Bank found that overall non-real estate farm lending in the first quarter dropped about 10% compared to last year. Within that group, loans to cover operating expenses are down almost 20% year over year, to a level not seen since 2012.
Worth noting: Hefty government aid via pandemic relief likely also contributed to the decrease in lending activity.
The outlook: Most economists seem to agree that commodity prices will remain strong through 2021, but higher input costs could curb overall profits on the farm. And you can bet ag lenders will be watching those income statements closely to see if loan applications will be headed their way anytime soon.
Honey, I shrunk the…corn pile.
Last Friday’s WASDE report for the month of April projected U.S. corn supplies or carryover to be lower than expected, which drove futures for the grain to prices not seen in eight years.
So are they hiding it under a bushel basket or what? Not quite. Instead, the tighter supply stems from stronger demand, both domestic and foreign.
The corn demand shifted across the following categories:
- Feed use: +50 million bushels
- Ethanol Usage: +25 million bushels
- Exports: +75 million bushels
The shrink ray missed the soybean pile, though, as there were some tweaks but no major updates. The USDA is predicting slightly lower crush, seed, and residual use but anticipates slightly higher exports. Soybean ending stocks remained unchanged from March at 120 million bushels.
Bottom line: While the data didn’t cause fireworks quite like the previous week’s Prospective Planting report, many will be eyeing 2021 data closely to gauge where the country’s commodities are headed in the fall.
Yeah, the above is farmers everywhere reading deeper into proposed tax changes coming out of D.C over the past few weeks.
Senate Democrats have introduced a tax proposal poised to prevent the estate tax from dying out. The Sensible Taxation and Equity Promotion [STEP] Act would tax currently unrealized capital gains at death.
It’s a grim proposition for farmers, who account for 1.7% of current estate tax generation. The STEP Act would eliminate the stepped-up basis that heirs receive for property and include a $1 million per person exemption.
Translation: For all our fellow novice tax accountants out there, a stepped-up basis typically means big-time tax savings. Eliminate it, and Uncle Sam will be showing up at farm gates across the country looking for his fair share.
Under current law, heirs receive the stepped-up basis in an asset’s value, and after that, they pay capital gains tax only after they sell the asset and only on gains after the original owner’s death.
The act would eliminate that and add a tax for transferring assets – like tractors or grain – as if they were sold for fair market value, even while the farmer is still alive.
This might sound familiar because there’s been a lot of death tax buzz lately. The act comes less than a month after the Republican-backed Death Tax Repeal Act of 2021 was introduced to the House and Senate. What a coincidence.
What’s next: Significant debate is expected as the Biden administration weighs this act in the context of paying for a new infrastructure proposal. The STEP Act has to make it through a 50-50 Senate – so it’s a game of wait and see.
Wednesday’s release of the USDA’s Prospective Plantings report left many in the ag industry with a furrowed brow.
Each March, the USDA sends out surveys to 80,000 farmers with the hope to better understand their planting intentions for the upcoming growing season. And most years, the big reveal is preceded by lots of hype, speculation, and uncertainty.
And farm economists have historical trust issues with the USDA’s data.
Lagging data often leads to revised reports months down the road. Last year even saw the final corn acreage tally 6.2 million acres below the March estimate. Woof.
But analysts still placed their bets. Between high grain prices, amped-up Chinese demand, and a slow South American growing season, most industry experts pegged farmers to be seeding corn and soybeans ‘fencepost to fencepost.’
Let’s just say the markets were caught a little off guard…
The surveys showed:
- Corn acreage expectations at 91.1 million, when the trade was anticipating 93.1 million.
- Soybean planting prospects at 87.6 million acres, a far cry from the 90 million expected.
The aftermath: Corn and soy prices went bonkers, both reaching their upper limit in trading for the day.
So, what’s mysteriously missing? About 3 million acres, noted University of Missouri economist Ben Brown. With steady acreage expectations for cotton and wheat, he’s intrigued where that cropland has gone in the estimates.
Looking ahead: Warm temperatures could make for a favorable and fast kickoff to corn planting. Add in the bookoo bucks on the table with current grain price levels, and growers might take the bait, adding in more acres to cash in.
Oh, snap. With planting season just around the corner, farmers might be experiencing a bit of “sticker shock” when making their crop insurance decisions this month.
Up, up, and away: According to ag economists, crop insurance prices have experienced the largest increase in more than a decade.
Here’s a breakdown of the USDA-set limits serving as “floor prices”:
- Corn: Up 18%, at $4.58/bushel, the highest price since 2014.
- Soybeans: A 30% spike has prices at $11.87/bushel, not seen since 2013.
- Cotton: A 22% jump has prices set at $0.83/pound, a 22% jump.
And as Successful Farming noted, producers will be incentivized to take supreme advantage of prices and plant “fencepost to fencepost and ditch to ditch.”
Go big or go home: With more export demand [see: China] and less of a stash of crop inventories than originally anticipated, prices are expected to drive higher.
But with higher prices, come higher premiums, and producers have seen a surge in crop insurance quotes as a result.
+ While we’re here: The latest trillion-dollar COVID-19 aid package has the House and Senate at odds. Recent bill tweaks left out help for farmers who suffered crop losses from 2020’s Iowa derecho and California wildfires. The Senate is working to reinstate what was stripped, but Democrat and Republican fisticuffs are expected before a resolution is agreed upon.