As the U.S. economy continues what some would call an unexpected upswing, a major component struggles. The agricultural portion of Gross Domestic Product, which accounts for more than $1 trillion annually, is not necessarily following along with the strength of the economy as a whole.
A U. S. Department of Agriculture report issued in December revealed that 2018 net farm income was projected at $66.3 million, down 12 percent over previous years. Adjusted for inflation, farm income for 2018 was among the lowest in 20 years.
Mix in high costs of inputs like seed, fuel and fertilizer with near-record low commodity prices and the result is a struggling economy.
“Input costs, while they’ve been fairly consistent lately, are still on the high side as far as overall input costs go. Commodity prices have really fallen off hard. We’re at a low for the past 15 years,” says Mike Williams, vice president for agriculture and commercial lending at Legence Bank in Galatia.
The Ag economy is unique
Not long ago the national economy struggled while the agriculture economy soared. Now, it seems the tables have turned.
Associate Professor of Agribusiness Economics at Southern Illinois University C. Matthew Rendleman says there are a number of reasons for the differences in the two economies.
“For one thing, the agriculture economy is tied to natural cycles,” he explains. “For example, if the price of corn goes up, farmers just can’t put on an extra shift and run the factory more. We have to make planning decisions and then wait for the seasons to come around and things like that. Supply and demand comes into play and the farm sector, because of the growing seasons, has to react more slowly.”
There are other factors, too, says Lance Martin, manager of the Williamson County Farm Bureau. He points out that it is every farmers’ goal to get the highest crop yields, for example, as possible. That way, he gets the most income. However, as other farmers achieve bumper crops, too, the supply can often outpace demand, lowering commodity prices — and income — for everyone.
“Plus you have weather-related issues that we can’t control,” he says.
“Agriculture also is often pretty policy driven,” Rendleman adds. “Plus we’ve got a lot of foreign markets to consider, too.”
Martin says agriculture also is unique because of the barriers to getting into the industry, explaining that production cannot be started, stopped or even adjusted very quickly.
“If you have livestock, for example, you can’t just say, ‘Hey, let’s stop production and still idle for a while and then we’re going to gear up and go again.’ You really are at the mercy of the markets.”
Williams says that farm cash flow can be extremely tight right now, and that has many of his customers concerned.
“For those that don’t do a good job managing their operations, this could be a tough year,” he says.
Williams says that producers need to put more effort into planning and selling what they produce.
“They have to know what will work for their operation: will it work to put on a little more fertilizer or an additional fungicide treatment? And as importantly, will your projected cash flow allow you to do that? You must control operating costs and you have to do a better job marketing.”
In agriculture, marketing does not refer to things like advertising or promotion. Agricultural marketing involves entering contracts for selling of grain or livestock at a future time and price. It can be challenging, but Williams says producers need to be very conscientious in making pricing decisions.
“They need to look at opportunities to sell 2019 grain right now,” he says. “Commodity prices are very low, but look during the summer months for pricing spikes. They may be short-lived, but they can be advantageous. They need to be watching the market every day and taking advantage of opportunities.”
Martin says a downturn in the ag economy affects more than just producers.
“Farmers are on full conserve mode right now. They’re holding off on the purchase of equipment purchases and related items.”
“Equipment retailers are struggling,” he adds. “The cash flow just hasn’t been there for guys that normally purchase a new combine or major tractor every two or three years to make those purchases. That, without a doubt, has hurt the retailers.
Martin says that those delayed purchases send out ripples to the rest of the local economy.
When there is a strong farm economy, farmers will go to equipment dealers and make new purchases or they’ll buy a new vehicle or even make household improvements. But in a down economy, those purchases are not going to be made. So it has a huge trickle-down effect.
There is hope, however. Rendleman points to the diversity of the agriculture economy, especially in Southern Illinois, as a plus. Additionally, he says the movement to community supported agriculture is encouraging.
“There are more and more people participating in things like buying local and farm-to-table efforts,” he explains. “Those are small but significant trends.
Martin says agriculturalists will continue to press on, as often, their parents and grandparents did before them.
“It seems like anybody related to agriculture always somehow perseveres and looks to the future, for greener pastures. Hopefully, they are around the corner.” He continues, “Spring is almost here and with spring, there always is hope.”