Trade And Tariff Problems For The US Farm Economy Are Persisting Into Late 2019.

By Howard Halderman

09 /23 /19

Tariffs, trade and federal immigration policies continue to be hot topics with regard to the U.S. farm economy. Despite price support from the government, farm income has shrunk to $70 billion, about 50% from 2013 levels, and retaliatory measures from China are beginning to manifest through long-term impacts. At Halderman, our experience in farm management can help guide you through cyclical troughs in revenue.

Components of farm revenue

Farm return on investment derives from asset appreciation and current return. When retaliatory tariffs are imposed on U.S. farmers, farm income is reduced. With most farm lease terms tied to gross production, there is a corresponding decrease in rents that in turn reduces the ROI (return on investment) to farm owners.

Tariffs also impact farm values, but the relationship is a bit more complicated. While farm income clearly factors in to the value of a farm, an imbalance between supply and demand can mitigate the income impact. Despite farm incomes being cut in half in the past six years, we have seen farm values in the central U.S. drop only by about 15 to 20% due to reduced supply of properties for sale.

Labor as a factor in farm income and farm value

We believe that a major challenge for farmers to maintain their revenue is finding reliable sources of labor to harvest crops. So-called "row" crops like corn and soybeans do require labor but use a comparatively large component of mechanical harvesting versus alternative crops like seed corn, seed soybeans, non-GMO crops, tomatoes, potatoes and blueberries.

When tariffs impact revenue, some farmers seek out these alternative crops to offset losses from reduced soy and corn prices. But specialized labor, primarily from immigrant labor sources, is required to profitably harvest these crops. With restrictive immigration policies, fewer people are available for this work, driving up labor costs and reducing income. With severe labor restrictions becoming more of a factor for farms of all sizes, the combined effect of tariffs and government policy are severely stressing the farm economy.

In addition, crops like potatoes and tomatoes can only be planted once every four years on the same acre, limiting their potential to mitigate losses from core crops. Always a large factor for farm profitability, labor becomes an even bigger issue when farmers are scrambling to cultivate alternative crops.

Structural changes in farm product demand

Not only do tariffs impact prices and farm revenue in the short term, we are beginning to see long-term changes arising from a permanent shift in demand from foreign countries. Due to the trade war with China, the federal government estimates that soybean prices have fallen approximately $1.65/bushel.

The beneficiaries of U.S. policy have been Brazil and Argentina, the world's next largest producers of soy. China has shifted from importing U.S.-produced soy and pork products to these two countries. The concern for farmers is that China has begun to invest in infrastructure in South America to facilitate the supply chain for farm products, a signal that demand for domestic products may never return to its former levels.

Weather is a problem as well

Tariffs and immigration policy can be managed, but weather cannot. In Indiana the period between June 2018 and May 2019 was the wettest in recorded history. Normally, farmers would plant crops in April, but due to adverse weather, many plantings were delayed until June. When planting is delayed, yield and income suffer.

Farmers are resilient and have been diversifying crops and exploring new crops like hemp, that is drought-tolerant and disease-resistant. But it will take perseverance, hard work and creativity to get through the current market challenges. At Halderman Real Estate and Farm Management, we can advise you about practices that can offset some of the challenges brought on by tariff and trade policy. We look forward to your inquiries and working with you.