The USDA expects prices for corn, cattle, and soybeans to be off a bit in 2018. Prices for wheat and hogs are expected to be higher. Given the large production levels of all these commodities in recent years, prices, while soft, have been stable due to relatively strong demand, boosted in part by robust export markets. The strong demand needs to continue, and, thus far, signs point to demand remaining strong. For example, Jim Robb, director of the Livestock Market Information Center, recently said the average American is expected to eat 219 pounds of red meat and poultry this year, the highest level since 2007.
In years past, crop producers could count on farm program payments to help offset the sting of lower prices. This won’t happen in 2018 as payments will be substantially lower. Dr. Brad Lubben, an extension economist at the University of Nebraska-Lincoln, estimates program payments received by Nebraska producers could be $400 million less next year.
Recent forecasts suggest Nebraska net farm income for 2018 will grow 5.9 percent. Dr. Lubben expects net farm income to settle between $4.0 and $4.5 billion through 2020. All this suggests the continued need for cost cutting, working with financial institutions, strategic marketing, and financial planning to help continue to navigate through the soft prices. Several factors will influence the profitability of agriculture in the coming year:
U.S. Economy: The U.S. economy has momentum. The unemployment rate, 4.1 percent, is at the lowest rate since 2007, hourly earnings were up 2.5 percent in December compared to the prior year, personal income levels are growing, and the country’s GDP is expected to grow 2 percent in 2018. A growing economy means growing demand for food, especially meats. The positive outlook for the U.S. economy should be a plus for agriculture.
World Economy: World economic growth is expected to be around 2.7 percent in 2018, helping boost export demand for U.S. agricultural products. Pay special attention to the economies of Canada, Mexico, China, Japan and South Korea, typically Nebraska’s largest customers for agricultural goods. The economies in each of these countries are expected to grow, with China expected to grow at around 6 percent. These growing economies should provide opportunities to sell Nebraska agricultural products.
Trade Policy: The biggest potential threat to agriculture remains the trade policy of the Trump Administration. The U.S. is negotiating with Canada and Mexico to modify the North American Free Trade Agreement (NAFTA). President Trump has threatened to withdraw from the agreement if he is not satisfied with the outcome of the negotiations. President Trump has also said he wants to renegotiate the U.S. trade agreement with Korea (KORUS). These trade agreements have been important contributors to growth in Nebraska’s exports. Watch the actions of the Trump Administration on trade policy.
Value of the Dollar: Changes in farm income tend to run counter to changes in the value of the dollar. The value of the dollar today is roughly 10 percent less than it was in early 2017. No doubt the drop contributed to the competitiveness of U.S. agricultural products and helped boost exports. A growing economy and higher interest rates will tend to push the dollar higher. Watch the dollar in 2018 to see if the decline in value continues.
Federal Taxes: Congress passed, and President Trump signed, major tax reform legislation last month. Early signs point to the reform legislation resulting more dollars in producers’ pockets through tax savings. The extra dollars will help offset the cash flow squeeze.
Jay Rempe is the senior economist for Nebraska Farm Bureau. Rempe’s background in agricultural economics, years of experience in advocating at the state capitol, and a firm grasp of issues allow him to quantify the fiscal impact of a regulatory proposal, and provide an in-depth examination of key issues affecting Nebraska’s farmers and ranchers.