Supply contraction key to farmer margin recovery: Rabobank

The challenging profit margin environment US farmers face will continue until at least 2018, according to Rabobank’s senior grains and oilseeds analyst Sterling Liddell.

The challenging profit margin environment US farmers face will continue until at least 2018 as the market adjusts to the current oversupply of row crops, according to Rabobank’s senior grains and oilseeds analyst Sterling Liddell.

“The only way for prices to regulate is to have a contraction of supply capacity, which means the market’s job over the next few years is going to be contracting acreage and forcing acreage out of production,” Liddell said at Rabobank’s Markets Forum in New York last week.

“By 2020 we expect a contraction of somewhere between three and five million acres in the US for corn, wheat and soybeans.”

Liddell said 2006 marked a fundamental shift in the market when row crop prices jumped dramatically, leading to a period of volatility that continues to this day.

Favourable growing conditions pushed record yields for US row crops in 2016, particularly corn and soybeans, which were up 12 percent and 11 percent, respectively, according to the USDA.

“We’re simply able to produce too much of these commodities at this point,” Liddell said.

This happens as farm income continues to decline. The 2016 Farm Sector Income Report showed that net cash farm income and net farm income both declined in 2016 – an expected 14.6 percent to $90.1 billion and 17.2 percent to $66.9 billion, respectively – for the third consecutive year after reaching record highs in 2012 and 2013.

Liddell also pointed to declining government support and farmers’ limited access to capital as key factors currently pressuring farmers’ profit margins.

He said government support was no longer producing profits in the farming sector under the terms of the 2014 Farm Bill and that Rabobank did not expect significant policy changes before the next Farm Bill in 2018.

Farmers are often forced to take out additional debt or use equity to cover their debts, making it difficult to reinvest in their operations, he added. Renegotiating these debts and reducing costs by bringing some acreage out of production will be necessary for this reinvestment, ultimately leading to higher commodity prices – but over a several-year time frame.

“We don’t expect to see an increase in farm inputs financing until we get to that recovery, which is projected to be somewhere in the 2018-2019 period,” he said.