Falling prices pose challenge to US agri in 2016

With global commodity prices at their lowest in a decade, farmers will soon look to reduce their rents.

The US agri sector could be in for a rough 2016, thanks to low commodity prices and higher borrowing rates. Growers will look to support margins by cutting input costs and asking for lower rents, an agri-economist told Agri Investor.

Global agri commodity prices are at their lowest since the depths of the financial crisis, according to data recently released by the United Nations. The Food and Agriculture Organisation’s monthly food price index last month fell to its lowest level since April 2009, and food prices in 2015 were their lowest since 2005, when adjusted for inflation.

In the US, the prolonged slide in agri commodities has resulted in a downward trend in cash rents and land values. But Dermot Hayes, co-director of the Food and Agricultural Policy Research Institute at Iowa State University, told Agri Investor the tendency of rents to lag behind swings in profits makes it likely that both rents and land values will tumble further.

“[Many farmers] have not yet tried to reduce cash rents to reflect the lower prices. They’re afraid to lose the farms if they do so,” said Hayes. “When people are forced to give up farms because they can’t get operating loans then it will become a buyers’ market. Instead of it being a sellers’ market and a landlords’ market it’ll be a tenant market. And I would expect cash rents to adjust quickly, which means land prices would then have to adjust. So looking forward, I’m pretty pessimistic on land prices.”

Researchers at the Kansas City Federal Reserve Bank recently warned that record short-term operating loans for the US agriculture sector in 2015 us ab indicator liquidity on US farms may be dwindling. According to the bank, farmers’ incomes have declined steeply over the last 3 years, while loans for current operating expenses have been rising steadily since 2011.

As farmers struggle with narrow profit margins, the impact of low prices is bound to reverberate across the value chain, said Hayes.

“For the tenants who are still paying those enormous rents it’s going to be a tough year,” he said. “[Farmers] are going to try and squeeze money everywhere and that includes using less phosphorus and potassium fertilisers, adjusting their seed choice downward to save money, and eventually they’re going to have to call the landlord and renegotiate the lease, but that’s going to take some time.”

The aggregate food price index (calculated by averaging the organisations’ food, cereal, vegetable, dairy, meat and sugar indices) fell by nearly 16 percent in the year leading up to January 2016, capped by a fall of nearly 2 percent between December 2015 and January 2016.  Downward pressure on prices in the final month of 2015 was most apparent in dairy and sugar price indices, which decreased by 3 percent and 4.1 percent respectively over the previous month.