FOCUS ON AG
Written by Kent Thiesse
Farm Management Analyst and Senior Vice President, MinnStar Bank
March 23, 2020
CARONAVIRUS IMPACTS ON AGRICULTURE
Daily updates and strategies to deal with the coronavirus (COVID-19) have dominated the national, state and local news for the past two weeks. The virus is affecting nearly every country in the world, all parts of the United States, and most local communities. Most families in the U.S. have felt some impact from COVID-19, either through the health prevention methods and “social distancing” being required to battle the spread of the virus, or by the economic impacts that have begun to become a reality from the coronavirus.
The agriculture industry, rural communities, and farm families have not been immune from the impacts of COVID-19. Farm families and rural communities have been impacted just like families in other areas of the country. Schools, churches, and businesses have closed in rural communities, with many businesses in rural communities already feeling the economic impact. Rural schools are gearing up to do E-leaning through the internet; however, this is a challenge in several areas where some families lack adequate broadband service to allow the E-learning. Rural communities in some areas are concerned about their limited hospital beds and available medical services. Similar to residents of the large cities, rural families have dealt with shortages and empty shelves in grocery stores.
Back in January and early February, there were a lot of positive signals in the grain markets, with the Phase 1 trade agreement with China and other positive trade news. Both corn and soybean markets seemed to stabilize and show some upside price potential. However, by late February, concerns over the coronavirus increased and kept getting worse into March, resulting in a major downturn in the grain markets. December corn futures on the Chicago Board of Trade, which are the underlying contract for 2020 harvest prices for corn, declined from near $4.00 per bushel in early February to below $3.60 per bushel by mid-March. Local cash prices for the Fall of 2020 dropped to near $3.00 per bushel in some Midwest locations, which is well below the cost of production for more most farmers.
To make matters worse for corn prices, ethanol production and profitability is being challenged by the low U.S. oil prices and reduced fuel prices. Some ethanol plants are considering reducing or suspending production, due to the low profit margins and reduced demand for ethanol. The demand for ethanol is not likely to increase in coming months, and U.S. fuel consumption in the Spring and Summer months is expected the be below normal in 2020 due to the impacts of COVID-19. About 5.4 billion bushels of corn per year is utilized for ethanol production, which represents 35-40 percent of the typical annual U.S. corn production.
Similar to corn, CBOT November soybean futures dropped from near $9.70 per bushel in early January to near $8.50 per bushel by mid-March. Local cash soybean prices for the Fall of 2020 dropped to below $8.00 per bushel at some locations, with most producers having a breakeven price of $8.50-$9.00 per bushel. The below breakeven price levels for 2020 corn and soybean production comes on the heels of a couple of very difficult weather and profit years for many Midwest producers.
The livestock industry has also been hit hard by rapid price declines in recent weeks as the coronavirus concerns have grown. June lean hog futures on the Chicago Mercantile Exchange (CME) dropped from near $90 per hundredweight (cwt.) to near $75 per cwt. That price drop represents about $30-$40 per hog marketed and has resulted in large losses for many producers. In the past week, cash hog prices have rebounded slightly, but CME hog futures prices remain below breakeven levels.
Probably no segment of agriculture has been hit harder in recent weeks than the cattle industry. June CME cattle futures were near $120 per cwt. in mid-to-late January, which provided some of the best profit opportunities in cattle feeding in over a year. However, June futures prices dropped dramatically in February and early March to below $90 per cwt. This price decline equates to losses of $300 to $400 per head in the market value of the cattle being sold by feedlot operators. In the past week, boxed beef cutout values jumped significantly; however, most of that gain has went to the packers and processors for beef products that were in inventory, rather than to beef producers.
Many farm organizations are hoping that the Federal government will include assistance to farmers and ranchers as part of any Federal stimulus or aid package in 2020, similar to the market facilitation program (MFP) payments in 2018 and 2019. It appears that the need for financial assistance to farmers will just as great or even greater in 2020 as it was in 2018 and 2019. Cattle producers are hoping that they will be included in any 2020 Federal aid program for crop and livestock producers, after being excluded from the 2018 and 2019 MFP payments.
As we deal with all the concern and negatives related to coronavirus, there are some positives for the agriculture industry. The U.S. Department of Homeland Security has released a list of “critical industries” in the response to the COVID-19 outbreak. That list included the agriculture industry, recognizing the importance of keeping food production, processing and distribution exempt from restrictions being placed on businesses and industries to minimize the spread of the virus.
Fuel prices for farm operations have declined considerably in recent weeks due to the sharp reduction in U.S. and world oil prices, which should help lower 2020 crop input expenses. In response to the rapid drop in the stock market and the major downturn in the U.S. economy, the Federal Reserve has lowered the Fed fund rate and the prime interest rate. The result has been to make lower interest rates available to farmers for both short-term and long-term ag financing.
For farmers looking to buy land in the coming months, it will mean being able to finance a portion of the purchase at significantly lower long-term interest rates than 6-12 months ago. The lower interest rates also provide an opportunity for farm operators to refinance some existing longer term debt at lower interest rates than they are currently paying. An interest rate reduction of 2 percent on a loan with a $500,000 principal balance would result in an annual interest savings of $10,000, which could be significant for farm operators facing cash flow challenges in 2020.
As we celebrate “National Ag Week” from March 22-28, we should all appreciate the work and extra effort that all people involved in the production, processing, transporting and retail distribution of food and other products to all of us throughout the year. In addition, during the challenging times of dealing with the coronavirus, please appreciate all the extra efforts that farm families and others in the agriculture industry and rural communities do as nurses, EMT’s, volunteer firefighters, and other important roles to manage this crisis.
Note — For additional information contact Kent Thiesse, Farm Management Analyst and Senior
Vice President, MinnStar Bank, Lake Crystal, MN. (Phone — (507) 381-7960);
E-mail — firstname.lastname@example.org) Web Site — http://www.minnstarbank.com/