Well it’s the end of the year and that means it’s time to take a look back at the year that was. 2014 was an eventful year for agriculture. Here are 20 of the top highlights as we saw them.
1. Farmers Start the Year Flush. The year began as many recent years, with farmers riding on a wave of very high profits. The financial condition of the U.S. farm sector was as strong as it has been in decades. A common bellwether of the farm sector profitability, farmland values, stood at all-time highs in almost every region of the country. Final estimates of 2013 reported producers were coming off the 3rd year in a row where net farm income topped $98 billion and a general trend of strong income that started in 2005.
2. USDA Outlook Points to Lower Incomes in 2014. I remember speaking at the USDA Outlook Forum and the news was about the call for a decline of 25% in net farm income in 2014. Soon after this, many reports began to suggest that the great farm boom was over and that times were changing rapidly. Some talked of a bubble that might soon burst. While the percentage decline in income was notable, we and others noted that the farm sector remained in relatively good financial condition and that we were coming off of several years of record profits. This also reminded us of an article that Mike Boehlje and Chris Hurt wrote in 2008 pointing out some of the differences between the 80’s and this farm boom.
3. Farmland Values and Cash Rents Stop Rising. 2014 may be recalled as the year when farmland values and cash rents stopped shooting higher. Conflicting information began to come in on the level of farmland prices, with USDA and a few others reporting that prices were going up, and many other surveys observing that prices were flat to trending downward. In our opinion much of this confusion was due to the timing of the surveys and the values/rents being measured.
At the end of the day, it appears that farmland values did level off and in many markets are down from their highs. Some are suggesting that a substantial correction may be in the works. It will be interesting to see how cash rents adjust. Unfortunately, the USDA/NASS also announced that they will no longer be conducting the county level surveys on cash rents. One must really wonder why such an important survey would be dropped when so many others remain (we won’t start a list of all the other reports that could be dropped, but you might take a look down this list and draw your own conclusions). Come on USDA, don’t drop that report.
4. RFS Sent to Purgatory. Ethanol demand mandated by the renewable fuel standard (RFS) has been a big driver of the great agricultural boom. The RFS has come under repeated scrutiny since its implementation, but the EPA’s late 2013 decision to reconsider aspects of the RFS was big news in 2014. After initially proposing to reduce the amount of ethanol blended into gasoline, the EPA postponed their decision to 2015. Many analysts are suggesting that big changes in the RFS are now unlikely. Keep watch in 2015 as big changes would be a surprise to the market.
5. Ethanol Profits High. The U.S. ethanol industry also experienced a strong year in 2014. With lower corn prices and strong domestic and export demand, 2014 was a great year for ethanol producers. As oil prices have begun to fall it will be interesting to see how this situation evolves in 2015.
6. Ideal Weather Leads to Gigantic Crops in the Midwest. The old saying is that rain makes grain. Well, it’s obviously a little more complicated than that. Timing of rainfalls, temperatures, and many other things play key roles in crop development, but 2014 apparently had it all about right. As the growing season unfolded, speculation began to mount that the U.S. was on the verge of producing a very large corn crop. While the actual totals were a bit lower than some of the mid-season prognosticator estimates, the crop was substantial. The last USDA estimates put corn at 173.4 bpa and soybeans at 47.5 bpa. As a result, stockpiles of most row crops are now comfortable. During this period we examined just how large the stockpiles were and concluded that while they are indeed large, we are not quite to the point of being ridiculously oversupplied.
7. California Drought. This summer California felt the grip of a powerful drought. The impacts have been staggering and documented in the dramatic pictures circulating on the internet. Some estimates placed the losses to California in excess of $2 billion. Even today, the drought is in full force with 99% of the state in drought and 55% in the most severe category. When will relief come? That brings us to our next weather story…
8. The El Nino that Never Came. In early June, the forecasts were for an El Nino to occur. The estimates were at 70% for a summer arrival and 80% by fall. Today, no El Nino and the forecast now places the chances at 65%. And even if El Nino arrives, there is no guarantee there will be relief, as not all El Nino’s behave the same.
Woes in the Grains
9. Crop Prices Experience Mid-Season Free Fall. As expectations about yields revved up, crop prices began a rapid descent. From June 30th to October 1st, the December 2014 corn contract lost $1.23 per bushel. This rapid decline easily pushed prices below the cost of production for most farmers. The sudden free-fall got people’s attention and the tone in the ag marketplace changed quickly. Farm magazines began running headlines with stories about the 80’s and encouraging farmers to carefully manage costs.
10. Transport and Basis Issues in the Northern Plains and Cornbelt Create Challenges. There were lots of headlines this summer and fall about the extremely wide basis levels in the Northern Great Plains. There’s no question that the development of the shale oil resources in that region have contributed to transportation challenges, but David pointed out in this post that the amount of grain produced in this region has grown substantially in recent years. We also examined how corn planting patterns have changed in recent years. Given the margin pressures that exist, one might suspect that corn plantings in this region will be under pressure next year.
11. Concern Over the Margin Squeeze. As prices fell, farmers and agribusinesses began to wonder how farmers would behave in the midst of the margin squeeze. We wrote several articles on the topic and have recently put out some ideas for how farmers can manage in this environment. The bottom line in our opinion is that the squeeze won’t be alleviated until fixed costs such as land prices, land rents, equipment costs, labor costs, and family living expenses adjust, 2) prices rebound, or 3) some combination of 1 and 2 occur.
12. Early 2015 Budgets Show Big Potential Losses. In late Fall universities start to put out crop budgets for 2015 and the early numbers weren’t pretty. In fact, many showed budgeted 2015 losses in excess of $100 per acre. As a result, people began asking the question of what would change for next year. We argued that land rents weren’t likely to go down too much in 2015 and also looked at how equipment spending and seed expenses have changed over time. Our prediction at the time was that equipment spending would likely be slower this year-end than in the recent past and that 2015 would be tough for many equipment dealers. We also suspected that corn planting on the periphery of the Cornbelt may be down next year.
13. Surprise Corn Rally Buoys Spirits. Something surprising happened while harvest of the largest corn crop in U.S. history was underway. Grain markets began to rally. From a low of around $3.21 per bu on October 1st 2014 to December 1st, 2014 corn prices rebounded by almost $0.54 per bu. While the rally hardly brought prices back to levels of recent years, they seemed to lift the mood a bit in the sector. We encouraged everyone to keep a close eye on the crop insurance price discovery period for clues about next year.
14. Livestock Profits Surge. While row crop incomes were under pressure in 2014 and likely 2015, the livestock industry experienced outstanding levels of profitability. For most it appears that the future remains bright for 2015.
15. Porcine Epidemic Diarrhea Virus. Also known as PEDv, the virus rocked the hog and pork markets. Having no impact on human health, PEDv left the industry with fewer hogs to market (driving-up hog prices) and producers worrying about their herd health and the significant financial losses associated with a barn breaking with the virus. The heat of summer reduced the number of PEDv cases, but a second wave of cases is likely this winter. The size and scale of any future outbreak is unknown.
Ag Manufactures and Retailers feel the Pain
16. Machinery Dealers Start to Feel the Pain. As commodity prices fell, a number of people suggested that one of the first things farmers would cut back on was new equipment purchases. As a result many equipment manufacturers and dealers began to get ready for a more difficult environment. Recent data suggests that four-wheel drive combines and self-propelled combines have experienced the softest sales of recent, with November sales for both off more than 50% from a year ago.
17. Ag Manufacturers Cut Jobs. John Deere led the scale back in August announcing a cut in its workforce, mainly from its agricultural equipment division. Syngenta announced in late November it was reducing its global workforce as well.
Federal and State Government
18. A New Farm Bill is Passed and Farmers are Still Scratching their Heads. Congress and the President finally came to terms on a new Farm Bill and guess what? It offers more complicated choices for farmers than any bill in recent memory. While the options to update yields and bases were pretty easily deciphered, the choice of whether to elect PLC, ARC-Individual, or ARC-County will be the subject of many meetings and discussions this winter. Even the prices used to determine payments under the various programs, or the Market Year Average prices, aren’t as simple as they may initially seem.
19. Interest rates stay LOW. Low interest rates have benefited the farm sector for several years and they continued to stay low in 2014. While many have been arguing that rates can’t go much lower, rates continue to stay low and even on occasion dip lower. Given recent signals from the Federal Reserve, 2015 may be the year that changes, but 2014 will again be remembered for another year of very low rates.
20. GMOs on the Ballot. Ballot measures dealt interesting results this year. While measures to require labeling of foods containing GMOs failed to pass in Oregon and Colorado this fall (not the only agriculturally interesting ballot measure coming out of Colorado these days), a ban on growing GMO crops was passed by voters in one Hawaiian county. While the courts will likely see some action on the final status of the ban, the attention and focus on GMOs has been growing.
Well we couldn’t actually stop at 20 so here are a few more things that we found noteworthy.
21. Ebola Causes U.S. Scare. Unfortunately a major Ebola outbreak continues to plague 3 African countries with absolutely horrific and saddening consequences. Many in the U.S. became acutely aware of the situation when a case emerged in the U.S. The outbreak dominated the news coverage in the U.S. for several days and some began to wonder whether it could have a major impact in the U.S. While the situation is still terrible in Africa, it appears that initial fears of a U.S. outbreak were likely overblown. With nearly 18,000 cases and over 6,300 deaths in Sierra Leone, Guinea, and Liberia, much work on controlling the disease remains. It will be important to see how the outbreak is managed in the coming months of 2015.
22. Big Data and Big Ambition. Big Data was a big story in 2014. Monsanto’s fall 2013 purchase of Climate Corp for more than $900 million left the industry re-scaling the potential data plays in production agriculture. Monsanto’s President highlighted the market farm data market as a $20 billion dollar potential and DuPont estimated a $500 million revenue stream from a new agronomic services offering in the coming decade. It seemed that every conference and meeting had at least one session on data this year.
23. Viptera Nightmare. Another prior-year event with a hangover lasting into 2014 comes from Syngenta and its Viptera corn hybrid. The GMO crop had received approval from many nations and has been planted by farmers in the U.S. since 2011. The issues surfaced when China, who had not approved the seed traits, started rejecting shipments of corn and dried-distillers grains. Lawsuits have been filed by both farmers and grain traders. This story is unlikely to wrap up before the end of next year either.
24. Russia, Ukraine, and Now an Embargo? Due to their invasion (or incursion if you prefer) of Ukraine, Russia is probably going to make a majority of the “year in review” lists for 2014. One of the biggest agricultural trade events in 2014, that has seen little attention in the US, is the Russian one-year embargo on agricultural imports from nations that have established sanctions against Russia. While the U.S. is on the banned list, the impacts have been felt the most in the E.U. where fruit and vegetable markets have suffered from free falling prices.
25.Oil Prices Plummet. Most consumers got an early Christmas present when oil prices took a nosedive. West Texas Intermediate crude prices have now fallen below $60 per barrel after having been as high as $107 per barrel. It remains to be seen how this plunge will impact the ethanol industry and what it means for (or about) the broader world economy. It is something to watch closely going forward.
Well there you have some of what we saw as highlights this year. Of course we left out a few including the status of the European economy (not going so well) and the economic recovery in the U.S. (going pretty well) along with lots of other stories that are sure to make 2015 an exciting year as well. We wish you the best for 2015.
Brent and David
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Photo by Johnny Klemme