It’s been a tough year in farming, and farmers fear things could get tougher if President-elect Donald Trump does away with NAFTA, the free trade agreement between the U.S., Mexico and Canada.
“The farm states put Trump over the top,” said farmer and grain futures trader Jerry Gulke of The Gulke Group. “You could say Trump owes us something.”
Farming usually moves in boom and bust cycles, but everything right now is close to busting. The USDA predicts farm incomes will fall 17 percent this year. Corn prices are below break-even levels, while soybeans are doing better. “Wheat is terrible, there’s no profit in it,” said Gulke.
At a recent Federal Reserve meeting he attended, Gulke was told nearly every sector in agriculture is underwater or barely profitable. “Those people who go to church and pray for plenty of food, they got their wish.”
The meat of the matter
Low grain prices should be a boon for livestock ranchers, as feed is their largest cost. Apparently that is not the case. “No one’s going to make money this year,” said Wyoming rancher Brett Crosby, who runs Custom Ag Solutions.
The reason Crosby and other ranchers are losing money, even with lower feed prices, is because the industry has gone from too few cattle to too many. Ranchers rushed to thin their herds during a massive Midwest drought in 2012, which eventually sent beef prices rising. Ranchers then did an about-face as conditions improved, adding cattle to chase higher prices.
“Rebuilding occurred faster than I thought it would,” said Crosby. Now, he said, packers and retailers have pricing power. “Most cow-calf operators need about $1,000 a calf to break even. They’re getting about $600-$700 a calf.” A glut of beef and pork is predicted to continue into 2017 and possibly beyond.
Farmers and ranchers both depend in part on exports, and many are leery of any trade war that the new president could ignite. Agriculture remains one of the few industries where the U.S. still has a trade surplus.
“Exports add a couple hundred dollars to the value of the animal,” said Crosby. “Japan, South Korea and Hong Kong buy more U.S. beef than all other countries combined.” Like many, he’s taking a wait-and-see attitude about the new president. “My hope is that he continues to follow the path of deregulating operations and businesses to make them more competitive in global markets, rather than going down the path of protectionism.”
Gulke has two concerns: NAFTA and the dollar. “We’ve won big with NAFTA,” he said. Mexico and Canada are huge buyers of U.S. agriculture products. At the same time, “‘Making America Great Again’ means the dollar gets stronger, and agriculture becomes less competitive.”
He said a lot of buying was done ahead of the election in case of a Trump win. “Mexico bought a lot of corn.” China, meantime, buys a lot of American soybeans. What if the new president provokes the Chinese into trade retaliation? Gulke isn’t worried. “They say one thing and do another,” he said. “They’re still buying soybeans like crazy.”
Is ethanol at risk?
There have been some winners in this farming environment. Low corn prices have been great for ethanol. The EPA just raised the amount of corn-based ethanol to be blended into the U.S. fuels market to the statutory limit of 15 billion gallons. “Everybody has a chance to make some money, but it’s not outrageous,” said Todd Becker, CEO of Green Plains, which has grown into the second-largest ethanol producer in the world with 17 plants.
This even as the oil industry — suffering from its own low prices — could push the Trump administration to reduce support for ethanol. “I think some people would still like to see the death of ethanol,” Becker said, even though he said the product is now competitive without federal mandates.
“Ethanol has become the backbone of agriculture” he said, by buying corn which farmers would have no market for. “If we stay in $50-$70 oil and $3-$4 corn, we’re in a very good, competitive world.”
Like Gulke, Becker hopes Trump will remember the people who voted for him.
“I was there in Iowa when he said, ‘I support the renewable fuel standard,’ and I was there when he said, ‘I love ethanol.’ I assume he’s going to stick to his word.”
Gulke is starting to make planting decisions for 2017. “Right now there is a $120-$130 an acre advantage beans.” He predicts there will be a 4 million acre shift from corn to soybeans in the next year, but there will still be a surplus of everything, barring a major weather event globally. “Even an average crop next year will be too much.”
Meantime, bankers are tightening lending, demanding more collateral from farmers for loans. What hasn’t happened yet on any meaningful scale is farmers selling land to pay debt, a situation which cascaded into a crisis 30 years ago. Gulke hopes farmers used the last few boom years to improve their balance sheets.
He’s being patient about the new president. “It’s more important to see what he does than what he says.”