As Production Outpaces Demand, Ag Sector Outlook Grows Pessimistic

Federal Reserve bank districts report that agricultural sectors have weakened overall since November, and that farm incomes are stressed. Flooding and drought in various regions are aggravating the effects of already low and falling prices for farm commodities, caused in part by weak global demand and the strong dollar.

U.S. Federal Reserve System Districts

With few exceptions, commodity prices for crops and livestock have remained low or have fallen since November. Regional Fed banks in Chicago, Kansas City, and Dallas report that conditions are not profitable for some producers, as farm input prices have not fallen as fast. These three Districts also cite large harvests as a factor in keeping commodity prices low, while Kansas City and San Francisco reported that weak global demand and the strong dollar held down livestock exports. Drought remains a problem in parts of the San Francisco District for some producers, while heavy rain and flooding impacted harvests in the Richmond, Atlanta, St. Louis, and Dallas Districts.

Prepared by the Federal Reserve Bank of Philadelphia and based on information collected through January 4, the Beige Book summarizes comments received from business and other outside contacts.

The following is a Fed region-by-region summary of farm sector economic conditions, starting in the Mid-Atlantic and moving west:

Richmond – Agribusiness activity remains soft. Farmers in Virginia, North Carolina, and South Carolina continue to report delayed harvesting from the wet fall, and more South Carolina contacts report poor crop quality as a result of flooding. Some South Carolina farmers have reported ruined cotton crops. Moreover, continued rain following the floods in South Carolina left other establishments unable to harvest soybeans for animal feed. A South Carolina sod farmer said he had only one week of good harvest days during the past month. In contrast, a Maryland contact report that farming was stable across the state, with continued strength in the poultry sector. Cotton prices decreased and farm input prices were unchanged since the December report.

Atlanta – Most of the District is drought free, but as a result of excessive rain, winds, and flooding earlier in the year, the U.S. Dept. of Agriculture declared several counties in Alabama, Florida and Georgia as natural disaster areas. Florida’s orange forecast was down both from last month’s forecast and last season’s production. On a year-over-year basis, prices paid to farmers for cotton, rice, soybeans, beef, and broilers have declined while corn’s price rose slightly.

ChicagoFarm incomes declined as the large harvest pushed product prices down faster than input costs. Most contacts expect that Midwest farmers will face tighter (and possibly negative) margins this year. Many farmers are holding on to much of their corn and soybean harvest, hoping that prices will go up before they need to sell them to fund 2016 operations. Many are also waiting on purchasing inputs, anticipating that seed and fertilizer prices may decline further. One contact reported that more farmers are testing fields for nutritional deficiency before applying fertilizer to reduce input costs. Dairy, egg, hog, and cattle prices moved lower, although cattle prices rallied some toward the end of the reporting period.

St. Louis – As of late November, the region’s winter wheat crop was roughly 95% planted, which is consistent with recent history. More than 94% of the winter wheat crop is rated fair or better. However, due to warmer weather about 86% of the crop had already emerged—a proportion that is notably higher than recent averages. Moreover, late December flooding has led to concerns about significant crop damage.

Minneapolis – Agricultural conditions softened since the December report. Crop prices remain low, and farm incomes for 2015 are expected to be at their lowest levels in a decade. District sugar beet growers are concerned about reduced demand, as candy producer Hersey Co. switched last year to cane sugar due to consumer concerns about genetically modified ingredients. Several District cattle producers reported that a sharp drop in prices late in the year substantially downgraded their financial outlook. Prices received by farmers fell in November compared with a year earlier for wheat, soybeans, hay, milk, chickens, hogs, and cattle; corn prices were unchanged, while prices increased for eggs and turkeys.

Kansas City – Agricultural commodity prices generally remained low since November, keeping farm income expectations subdued. Although crop prices increased slightly in December, a strong fall harvest kept corn prices near year-ago-levels, with soybean prices significantly less than a year ago. Wheat prices also remain lower than year-ago levels alongside solid winter growing conditions throughout the west central Plains region. In the livestock sector, both cattle and hog prices are significantly below year-ago levels in the face of increasing supplies and relatively weak global demand. Both crop and livestock prices remain below the cost of production for some producers, continuing to strain farm income and cash flow. District contacts expect income to remain relatively soft in the coming months.

Dallas – The region continues to receive ample rainfall, keeping drought conditions at bay and providing good soil moisture going into the spring planting season. Last year’s crop harvest was above the five-year averages for most crops. However, crop prices are generally low, even sub-profitable for some producers, and much of the cotton crop has been discounted further because of damage from excess rain. The low prices are leading to some financial stress among agricultural producers. Cattle prices are well below year-ago levels but are still quite strong historically.

San Francisco – Activity in the agriculture sector has been flat since November. Despite an unusually wet early winter, drought conditions remain a challenge for growers and ranchers in much of the region. Shortages in water reserves have reduced the size and weight of some nut harvests and raised production costs by forcing producers in parts of California to pump more water. Inventories for dairy products and beef cattle rose as the elevated dollar held down exports. By contrast, dollar effects on exports of pork products were partially offset by rising demand from East Asia. ■

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