Trade to be the big issue in coming year

Jan Shepel
International trade is incredibly important to hundreds of thousands of American farm and ranch families.

MADISON - If there was one message that came through loud and clear to a large group of farmers, economists and University of Wisconsin officials at the Jan. 25 Agriculture Outlook Forum it was this – trade matters. A varied panel of economists and analysts noted that American farmers are very good at producing milk, corn, soybeans and other crops and they need to be able to move that production outside the United States.

“You’d think we coordinated our presentations, because we’re all talking about the importance of trade,” said economics professor Steve Deller, “but we didn’t.”

“Trade solves a lot of our oversupply issues, with exports in dairy, corn and soybeans,” said Paul Mitchell, an agricultural economist professor at the UW-Madison who is also director of the Renk Agribusiness Institute. “Trade is going to be the big issue.”

During negotiations on the North American Free Trade Agreement (NAFTA) President Donald Trump has threatened to pull out of the trade pact between Mexico, Canada and the United States. Brenda Boetel, chair of the UW-River Falls department of agricultural economics, said that if the U.S. corn market lost its trade with Mexico it could mean a 20-cent per bushel loss to the domestic market here.

During negotiations on the North American Free Trade Agreement (NAFTA) President Donald Trump has threatened to pull out of the trade pact between Mexico, Canada and the United States.

“It’s hard to calculate and that’s probably an over-inflated value because our corn will go somewhere else, but it could have serious consequences for U.S. corn.”  China, she added has begun getting soybeans from South America but it isn’t known how much of that is due to political and trade effects.

At the start of the Trump administration the United States pulled out of the nearly completed Trans-Pacific Partnership and our doing so “left a big leadership vacuum that China has stepped forward to fill,” said Mark Stephenson, director of dairy policy analysis at UW-Madison.

One of the concerns is that the TPP is moving forward without the United States. “It’s a loss of potential,” said Boetel. “If we have bilateral agreements we could see growth in exports.”

Without substantial growth in exports, the economists agreed that Wisconsin farm income in general will be up only slightly over last year.  “It will be the end of the free fall of the last three or four years, but it’s still not good,” said Mitchell. “The projected costs going into this year imply negative margins.

“It’s going to be another year of tight margins, especially for corn and dairy.”

One thing going up is Wisconsin’s farmland value which was up 9.5 percent in 2017. Rents were up as well in most parts of the state. In some regions of northern Wisconsin, land rents were up 30 - 37 percent and in northeastern counties farmland rental rates were up 12 percent. “Those are big jumps in rent in one year’s time,” Mitchell said.
The average land rental rate in Wisconsin is $117 per acre.

Aside from land rent, costs to farmers for growing their crops haven’t changed a great deal, he said.  Fuel and labor costs were up with total costs up 1.7 percent in 2017. Many farmers have cut back on variable inputs to save money.

Mitchell predicted a 75-cent-per-bushel negative margin on corn for the coming year with a positive net margin of 98 cents per bushel on soybeans.

For many farmers, he said, capital has been drained due to tight margins for many successive years. Farmers have increased their borrowing to get by, but the rate of increase has slowed, he added. In the United States as a whole, the farm debt-to-asset ratio stands at 12.7 percent, but in 2017 that ratio increased by only 0.2 percent.

However, Mitchell noted that Wisconsin holds the dubious distinction of having the highest number of farm bankruptcies in the nation. Chapter 12 is the legal chapter used by fishermen and farmers in bankruptcy court. In 2017, Wisconsin had 41 such filings, he said, with most of them in the western district of the state.

Vernon, Marathon and Juneau counties had the highest number of Chapter 12 filings. Mitchell noted they included conventional farms, organic operations and encompassed farms that were both large and small in size.

Dairy experts say trade and exports can’t be overestimated at this time, and that more markets need to open up if Wisconsin is to sustain the same number of milking cows.

Dairy outlook

In his outlook for the dairy industry for 2018, Stephenson also highlighted the importance of trade. “Trade and exports can’t be overestimated at this time,” he said. “We have to have more markets if we’re going to have the same number of cows.”

California was down in milk production 2.09 percent in 2017 compared to 2016 and one large dairy processing plant recently closed. But Wisconsin’s production was up 2.44 percent in 2017 and Michigan was up 5.2 percent. Wisconsin’s added production amounts to 7 million pounds per day and if that’s added to Michigan and New York’s added production, it amounts to 15 million pounds of milk per day. “Michigan needs a dairy plant desperately.”

This oversupply of milk in eastern states has resulted in “a lot of erosion of premiums in Wisconsin and New York,” he said.

Stephenson showed data illustrating that for every downturn in milk prices paid to farmers in recent years, there has been a collateral downward trend in exports. “The dairy products we intended to sell offshore build up in the United States and put downward pressure on milk prices.” In 2014, when prices were very good for dairy farmers, there were normal or below normal levels of stocks.

People in the United States have increased their dairy consumption almost two pounds of milk equivalent per person per year but he noted that “barely keeps up with productivity increases per cow.” A relatively strong U.S. economy is helping as consumers have enough money to purchase additional food.

The “long trough” in dairy prices, as he called it, is related to international factors and trade. “Rather than a deep cut this is starting to feel like a long scrape.” With that “long scrape”, dairy farmers have been “consuming capital” for close to three years.

“Bob Cropp had it easy,” Stephenson quipped, referring to his predecessor in dairy price analysis at the UW. Today’s market depends on so many other factors and has many more moving parts than it did in Cropp’s day.

Dairy prices here are affected by major exporting regions like the European Union, which has government-purchased “intervention stocks” overhanging the market and depressing prices. Since those stocks are in the form of powder, they are dragging down non-fat dry milk prices. “The world supply of milk protein is excessive and the EU is in the driver’s seat.”

Stephenson predicted that Class III prices would decline by $1.35 per hundredweight this year, while Class IV would take an 85-cent hit and the all-milk price would be down $1.55. “2018 will feel a lot like 2016.”

Mexico, the U.S. biggest export market for meat, is down in American purchases as the EU ramps up pork production and steals a bigger share of the Mexican market.

Livestock and grain

Boetel noted that livestock production – including poultry – was up in 2017 and that trend would continue into 2018.

“We are producing a lot of red meat and poultry. 2018 will be the fifth consecutive year of record-setting production in poultry and that increases our reliance on exports,” she said. For pork it will be the fourth year of record production.

Mexico, our biggest export market for meat, is down in U.S. purchases as the EU ramps up pork production and steals a bigger share of the Mexican market.

Analyzing the figures, Boetel believes that beef production will grow faster than pork or poultry. Production was up 3.8 percent in 2017 and will likely be up again by 4.9 percent in the coming year. About 30 percent of U.S. beef exports go to Japan, but that country has a 39.5 percent tariff on that beef.

Without bilateral trade agreements, which could fix tariffs like that “it is potentially devastating to these industries,” she said.

Boetel said beef producers here will likely see increased bargaining power for packer, because of growing beef supplies and limited packer capacity.

In the soybean market, she noted that demand is strong but it’s not growing as much as production and again, trade is crucial. The U.S. share of the Chinese market has dropped to 30 percent “and the USDA will likely revise that projection downward,” she said, as the Chinese get more and more beans from South America.

Import specifications may play a part in this as the Chinese allow only up to 1 percent foreign matter in their imported beans. Current number-two beans allow 2 percent foreign matter.

In the corn market, carryover will increase and export commitments are down 23 percent to large buyers like Mexico, Korea and Japan.

In the corn market, carryover will increase and export commitments are down 23 percent to large buyers like Mexico, Korea and Japan. While a bullish factor is the large number of U.S. cattle on feed, which will consume a lot of corn, Boetel said that there is limited upside potential for price “unless there is some weather catastrophe.

“We need exports to help absorb this large supply. If there is a theme it’s this, we are great producers and domestic consumption is good but we need exports.”

Cash corn prices will be similar to 2017, possibly 10 cents more per bushel; soybeans, she predicted, will be about $8.46 per bushel at harvest.

Factors to watch will be the strength of the U.S. dollar, which affects trade, China’s purchases of soybeans and Argentina’s soybean exports after removal of an export tax for soybeans.