With year-end 2019 forecasts for farm values and farm income thrown into chaos by the Coronavirus pandemic, the trade war with China seems almost like a distant memory. Prior to the pandemic, farmers were encouraged by the new trade accord signed in January, which set threshold purchasing of farm products by China to higher levels than in 2017.
Prior to the disruption, net cash farm income (NCFI) was anticipated to decrease somewhat in 2020. In the past several years, farm values have proved to be somewhat resistant to stable or declining farm income, with supply shortages swamping income effects. Assuming some stability is restored to the economy by the summer, what will 2020 be like for farmland values?
Even prior to the pandemic, economists focused on commodity prices and production expenses as the keys to determining cash rents for farmers. The expectation heading into 2020 was that higher commodity prices and production costs would continue to exert margin pressure for most crops. Overall, the forecast from the University of Nebraska Lincoln, performed earlier this year, predicted a downward trend for cash rents.
Taking Nebraska as a case study, economists forecast a decline in farmland values for the state after several prior years of increased values. Extrapolating across the entire central region, a slight reduction in farmland value was also forecast.
USDA income data
USDA economic research conducted in February 2020 projected a reduction in net cash farm income to approximately $109 billion, a decrease of over $13 billion that would equate to about the same level as 2017. The analysis notes a high level of sales from inventory in 2019 that would not occur in 2020. As a result, there was a rather large discrepancy between net cash farm income and net farm income.
While the trend line for net cash farm income was down, the net farm income measure was 5.4% above its inflation-adjusted 2010-2018 average. Generally, net farm income provides a more accurate assessment of farm production since net inventory amounts are removed from the data. The takeaway is that pre-pandemic, the farm production forecast was positive.
Four main crops
Among the four principal crops that constitute a significant portion of overall planted acreage and farm revenue in the U.S., corn and soy are expected to rebound in 2020, with wheat and cotton expected to decrease somewhat. Unlike 2019, a year in which farmers depended on government subsidies for a large portion of their income - and in some cases, sheer survival - overall planting and projected yields appear to be healthier.
On the demand side, increased demand for wheat and corn and flat demand for cotton point to increased crop prices across the board, particularly when decreased cotton production is factored in.
As of March 2020, the Coronavirus has contributed to a major fall in U.S. equity markets and prompted a large-scale bailout for U.S. consumers and businesses. Another casualty of the pandemic is phase 1 of the January trade agreement. With China's economy suffering approximately a 9% reduction in Q1 of 2020, the Chinese government is expected to invoke provisions in the agreement to delay its stipulated additional purchases of U.S. farm products.
Farm values will likely decrease even if there's a spike in demand for farm properties as a shelter investment against global disruptions, but it's still too soon to determine the overall trend for the balance of 2020.
Halderman Real Estate and Farm Management has advised clients for generations with regard to farmland acquisitions and operations. We look forward to discussing your concerns about the trends for farmland prices in 2020 and beyond.