By: Brent Gloy & David Widmar, previously published by Successful Farming
The calendars say 2019, but many of the same headaches and management challenges from 2018 still linger. While always a component of production agriculture, uncertainty has moved to front and center over the last few years. Compounding the issue are difficult farm financial conditions that have continued to erode.
While it comes as no surprise, 2019 is shaping up as another difficult year in agriculture. As producers begin planning for the upcoming season, they are likely to find a difficult budget outlook. To help with planning over the upcoming year, we sat down and mapped out the 7 biggest uncertainties facing farm managers and offer a few tips and insights into how to approach them.
When considering nutrient management in soybeans, potassium is the most important nutrient for proper plant growth and development.
- TRADE POLICY
A tone of positive – or at least not negative – trade news came in early December. During talks at the G20 summit, China and the U.S. appeared to agree on a roadmap for trade negotiations. However, there is still great uncertainty surrounding the resolution of differences between the countries. Key issues – including Chinese purchases of U.S. agricultural products – and a 90-day time frame for negotiations were outlined in the White House’s summary of the meeting.
The biggest piece of the trade negotiation for U.S. agriculture is on the retaliatory soybean tariffs China has imposed. Producers should consider the probability of China removing the 25% tariff on U.S. soybeans before March 1, 2019, and consider what might happen if the talks succeed or stall. It will be critical to think carefully about the risks and returns that could be generated under either scenario.
- 2019 ACREAGE
Given that acreage decisions are the starting point for estimating annual production, much attention is often paid to planting decisions. 2019 will be no exception. In fact, acreage fever will likely be in overdrive this spring. The first uncertainty to be resolved is winter wheat acreage, which the USDA will report on in early January. If producers sowed additional winter wheat acres (which was an uphill battle against Mother Nature last fall), this could alleviate some of the pressure on corn and soybean acres in 2019.
Given uncertainties around soybeans and trade, producers should think about their own 2019 planting decision using different scenarios. For example, if the U.S. and China do not reach a trade agreement before March 1, 2019, and soybean prices remain low, how few of acres will your farm plant? Alternatively, if the U.S. and China reach a trade agreement and soybean prices improve relative to corn, how does this impact planting decisions?
- HIGHER COSTS OF PRODUCTION?
After several years of falling cost of production, some cost components in the budget could turn higher in 2019. Fall fertilizer prices have foreshadowed this, and producers should carefully consider their farm’s unique cost of production. For some, costs might very well be higher in 2019. This is certainly an unwelcome headwind. Are there things you can do to proactively offset cost increases?
- $10 SOYBEANS IN 2019?
The November 2019 soybeans futures contract traded above $9.30 per bushel for a majority of November 2018. While most soybean commodity market news in 2018 was bearish, producers should consider if $10 futures prices are possible in 2019. While it would take numerous bullish factors to happen, much uncertainty remains for soybeans – and all commodity prices – in 2019. Key factors include trade, 2019 acreage, and 2019 yields.
Producers should ask themselves what the probability of the November 2019 soybean future contract of exceeding $10 per bushel is. And what will they do if $10 soybeans strike again? As conditions develop through the spring and summer months, producers should revisit this question and execute marketing strategies as warranted.
- ANOTHER YEAR OF STRONG YIELDS?
At the national level, strong corn and soybean yields have wreaked havoc on grain balance sheets and fueled growing inventories. In fact, 2018 marked the fifth consecutive year of above-trend yields for U.S. corn and soybean yields. Before concluding below-trend yields are “due,” it is important to recognize previous national yields have limited impact on what will happen in 2019. In other words, any given year is mostly independent of previous observations. This is to say yields are more like flipping a coin, rather than pulling cards from a deck. When flipping a coin, five heads in a row – however unlikely of happening – doesn’t change the odds of the next flip being heads also.
At the farm-level, strong yields have been helpful in offsetting low commodity prices. While prices have been disappointing, yields, for many, have been surprising to the upside. For operations with recently strong yields, yield expectations for 2019 could be skewed too high. This is to say the strong yields over the last five years, or so, could have 2019 expectations higher than what long-term yields (10- to 20-year average trend yields) might suggest is average.
Given farm-level implication, producers should think critically about the projected yield they use for planning and budgeting. What the probability of your farm being able to reach those projected yields in 2019?
- ANOTHER STRONG YEAR FOR THE U.S. ECONOMY?
The U.S. economy has been running strong in recent years. While a strong U.S. economy is good news, it has created some struggles. Farms that rely on hired labor may find it hard to recruit and retain talented labor given low unemployment rates. Furthermore, a strong economy leaves the Federal Reserve cautious towards inflation and, as we saw in 2018, likely to increase interest rates.
While higher interest rates will raise the cost of borrowing money, it will also place downward pressure on asset values – including farmland.
- WILL YOU MEET YOUR FINANCIAL GOALS?
Beyond your farm’s cost of production and expectations about commodity markets, what is the probability of your farm meeting it is financial goals for 2019?
Financial goals will be different for each farm. Whatever your operations’ goals, the first step is establishing these goals and documenting them. With your goals in mind, determine where you stand today given crop budgets and current commodity prices. Update your projections, as well as your expectations, regularly.
FINAL THOUGHTS
We acknowledge it can be unpleasant to think about these uncertainties and the potential implications for your farm. That said, successful managers must consider tomorrow’s uncertainties when making today’s decision. Peter Drucker summarized this well:
“The question that faces the strategic decision maker it is not ‘what his organization should do tomorrow.’ It is ‘what do we have to do today to be ready for an uncertain tomorrow?’”