Poor timing for no farm bill legislation

WASHINGTON — The U.S. agriculture sector is responsible for nearly 6% of the nation’s gross national product, and many industries depend on food, feed and fuel production, yet the farm industry is operating on farm bill policy set six years ago.

The implications of delaying passage of a new farm bill were the topic of a Farm Policy Facts’ Groundwork podcast featuring Nate Kauffman, senior vice president and Omaha Branch executive at the Federal Reserve Bank of Kansas City, hosted by Tom Sell.

“During September when Congress was in session, lawmakers heard a consistent theme from the agricultural sector of a financial storm brewing,” Sell said.

“Production costs from land rents to labor costs to machinery costs to even interest rates and the cost of money rose steeply in 2022 and 2023 and have stuck, while commodity prices have plummeted, creating a situation where many farms and many family farms are concerned about having the ability to cash flow and secure operating loans for next year.

“The situation feels dire and it’s not just the farmers. A recent survey of agricultural economists showed that more than 50% believe that the agricultural economy is already in a recession.”

The 2018 farm bill that provides an ag safety net among other policies expired on Sept. 30, 2023. It was extended through Sept. 30, 2024.

A second one-year extension of the 2018 farm bill would leave the ag industry working under a seven-year-old plan in the much-changed world of 2025.

Sell: Ag is a significant sector of our economy and an industry that relies on lending. Most farm families take out operating loans and there’s a lot of debt that’s carried on the land interest that are held in private hands throughout the nation. Could you talk about the significance of agriculture?

Kauffman: There’s a couple of places that I would highlight the importance of ag that might be sometimes a little underappreciated. One is just purely geography. This country has a large part of its geography that is tied to concerns of what might happen within agriculture or in a rural context just in terms of the area.

When it comes to the direct output that agriculture represents, it’s a relatively small share, but I think where it gets underrepresented is ultimately what that connects to by way of other industries.

When we think through the supply chain in agriculture, you have to start thinking about energy, you have to think about transportation, you have to think about services and segments of the economy that are very tied to ag.

It’s more than just the direct farm output. It’s the other industries that are also reliant on ag, ultimately translating into demand for food and fuel.

Sell: When assessing the state of the agriculture economy and looking at the indicators, what are some of the key things you’re looking at, what are the data points that you focus on?

Kauffman: When we think about agriculture, we do have a very heavy focus on monitoring credit conditions. Because I would argue that what you start to see play out in the way of credit will give you both an early sense the potential economic conditions that you’re going to see later on, but then also the degree to which you would worry about risk that you might see in agriculture.

So, we tend to pay a lot of attention to credit conditions. That’s also because the Federal Reserve is a bank. We have a lot of connections to commercial banks and the financial industry in general, and so we also tend to get a pretty good picture of what’s happening with respect to lending activity and credit by monitoring some of those conditions in agriculture.

Sell: There is a lot of concern about the state of the ag economy right now from the ground up. This was supposed to be a 2023 farm bill. The data shows significant reductions in net farm income and even in gross sales, particularly on the crop side. What’s the data that you’re looking at really showing with respect to the ag economy right now? What are the best hopes or maybe the fears that you have when it relates to crops and revenues?

Kauffman: 2024 had been a bit of a turning point year. What I mean by that is farm incomes and profits generally speaking for the last three years have been extremely strong.

Some of that early on in the pandemic was supported by government payments, but more than that it was that profit margins were very good as commodity prices were relatively high. We know that input costs were a challenge, but margins were generally pretty good.

This year we’ve seen a pretty sharp decline in crop prices. Cattle markets and other industries have still been relatively strong, but we’ve started to see some pressure coming by way of those lower crop prices.

I describe 2024 as a turning point because you could potentially see some scenarios two, three years out if the current environment persists where some of those challenges could continue to mount.

At the same time, when we look at measures that would suggest whether or not we’re seeing really difficult conditions right now, we’re just not really seeing it.

You’re not seeing a lot of, for example, defaults on loans, or you’re not seeing a lot of financial pressure start to emerge despite the lower commodity prices. I say it’s a turning point because we’re starting to see some of those conditions soften.

You could potentially see some conditions a couple years out, but if it persists there are more of those challenges even if you’re not yet seeing it in the data right now. We tend to look a lot at anything that would suggest some sort of early indication of potential financial stress.

Sell: Agriculture is a longer cycle than a lot of industries. You don’t have daily cash flow. This is the harvest season and I expect the last quarter of the calendar year is when the bulk of farm income comes in. How concerned are you about how this end of the year shapes up?

Kauffman: The fourth quarter tends to be the quarter where a lot of producers are making other decisions about assets. They’re thinking year-end and potential tax implications. So, you’re thinking about possibly a land purchase or sale.

You’re thinking about how you might be positioned going into what lenders will often describe as loan renewal season. You’re ending out the year and thinking about what things might look like for the next operating year.

The way I best described that as a potential turning point is because the backward looking data would still suggest that things have been relatively strong, land values being a good example.

Land values would still show that things are very, very strong and maybe even continuing to increase, but you’re also hearing some anecdotes of producers pulling back.

One of the measures that we tend to look at quite a bit in surveys that the Fed manages and maintains across the country is a measure of loan repayments, for example.

Most agricultural producers, when times are pretty good, they tend to take a conservative approach. They pay down debt and they tend to repay their loans maybe at even a faster than what you might see in the past.

The opposite is true then when things start to turn a little more concerning. They tend to take out financing when it’s needed and repay the loans at a little bit slower pace, and we are in fact seeing some those loan repayment rates start to dip.

We’re paying attention to what this next loan renewal season looks like, in part because the level of interest rates — even though it would come off a little bit from where things were recently, they’re still quite high relative to a few years ago and could factor into some of the challenges that producers would face.