purdue 2020farm economypresentation · 1918 1924 1930 1936 1942 1948 1954 1960 1966 1972 1978 1984...

Commodity Classic, February 27, 2020

James Mintert, Michael Langemeier & Jason HendersonPurdue Center for Commercial Agriculture

Fred Seamon, CME Group

Purdue.edu/commercialag


The Big Picture of Agriculture

vAg Booms …

vThe Booms Fade …

vThen Ag Plateau’s.

vWhat’s the New Plateau?


Plateaus in U.S. Agriculture

The Plateaus

1955-1972$79.5 billion

1989-2003$75.9 billion

2016-2019?$80-85 billion?

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

1940 1950 1960 1970 1980 1990 2000 2010 2020F

U.S. Net Farm Income(Three-Year Moving Average)

Billions (2019 constant dollars)

Russian Grain Deal

World War II

China & Ethanol

Source: Economic Research Service, US Dept. of Agriculture

1980s Financial

Crisis

Source: U.S. Dept. of Agriculture (USDA)

What can farmers expect for farm incomes?

USDA expects net farm incomes to rise 1.4% in 2020


Plateaus Occur in all Types of Crops

0

2

4

6

8

10

12

0

2

4

6

8

10

12

1866

1875

1884

1893

1902

1911

1920

1929

1938

1947

1956

1965

1974

1983

1992

2001

2010

U.S. Crop Prices

Corn Rice Soybeans Wheat Cotton

Index 1913=1

Source: National Agricultural Statistical Service, USDA

0

1

2

3

4

5

6

7

1918

1924

1930

1936

1942

1948

1954

1960

1966

1972

1978

1984

1990

1996

2002

2008

2014

StrawberriesIndex 1918=1

Even Specialty Crops

Source: National Agricultural Statistical Service, USDA

U.S. Crop Prices


What Causes Plateaus?

020406080

100120140160180

1935 1945 1955 1965 1975 1985 1995 2005 2015

Real U.S. Agricultural Exports (Billions of 2019 real dollars)


Slower Export Growth and Soft Demand

3.0% annual gain

2.1% annual gain


What Happens in the Plateau?

Government Payments Surge

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5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

0.0

5.0

10.0

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20.0

25.0

30.0

35.0

40.0

45.0

50.0

1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Government Payments Share of U.S. Net Farm Income(Three-Year Moving Average)

Percent

1980s Farm Crisis

Asian Tigers Financial

Crisis


By early 70’s, government payments were 25% of farm incomes

By 2003, government payments were 45% of farm incomes

How high will government payments rise?


How do farmers respond ?

0

20

40

60

80

100

120

140

0

20

40

60

80

100

120

140

1975 1980 1985 1990 1995 2000 2005 2010 2015

Farm Capital Expenditures in Machinery and Land Improvements(three year-moving average)Index (1980=100)

Source: Economic Research Service, US Dept. of Agriculture

Farmers limit capital investments… except for land


406080100120140160

406080

100120140160

1980 1984 1988 1992 1996 2000 2004 2008 2012 2016

Credit Conditions at Ag Banks in Federal Reserve Bank of Kansas City District (three year average)

Loan Extension and Renewals Repayment Rates

What does this mean for ag financing?

Source: Federal Reserve Bank of Kansas City

Farmers roll their operating loans.


$0

$20

$40

$60

$80

$100

$120

$140

$160

$180

$200

2012 2013 2014 2015 2016 2017 2018 2019F 2020F

U.S. Farm Sector, Real Working Capital (Billions of $)Source: USDA-ERS


0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

0.45

0.50

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019F 2020F

U.S. Farm Sector, Working Capital to Gross Revenue RatioSource: USDA-ERS


Farms in Financial Stress ClimbingBut Remains Below Most of the Last 3 Decades

3

5

0

2

4

6

8

10

12

14

77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17

% of Farms

Ending Year for 5-Year Period

% of Farms In Financial StressFive-Year Moving Average, 1977-2018

Source: Langemeier & Yeager, Kansas Farm Management Association Databank Purdue Center for Commercial Agriculture

Early 2000’s

‘80’s Farm Crisis


0.150.20

0.260.33

0.44

-0.50-0.40-0.30-0.20-0.10

0.000.100.200.30

0.400.50

10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Operating Profit Margin Ratio, Averages by Percentiles, 2009 to 2018Source: University of Minnesota, FINBIN

Percentile Median

Median = 0.125; Benchmark = 0.200


-$300,000

-$200,000

-$100,000

$0

$100,000

$200,000

$300,000

$400,000

$500,000

10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Capital Debt Repayment Margin (CDRM) and Replacement Margin (RM)Source: University of Minnesota, FINBIN, 2009 to 2018 Data

CDRM RM


Marked Farmer Sentiment Improvement…Classic Attendees Not as Optimistic

98

92

153

135 136

101

167

131

70

90

110

130

150

170

01/16 01/17 01/18 01/19 01/20

Index Value

Month & Year

Ag Economy Barometer

Source: Purdue University Center for Commercial Agriculture, Producer Survey, February 2020

CC


Optimism About the Future Was the Driver Behind Sentiment ImprovementNot As Much Divergence Between Current Conditions & Future Expectations Among Classic Attendees

142

128

179

133

70

90

110

130

150

170

190

01/16 01/17 01/18 01/19 01/20

Index Value

Month & Year

Indices of Current Conditions and Future Expectations

Index of Current ConditionsIndex of Future Expectations

Source: Purdue University Center for Commercial Agriculture, Producer Survey, February 2020

CC


Farmers More Optimistic About Trade Resuming Soon

55

7280

6878

71

5951

38 34 31

4845

2820

3222

29

41 42

57 54

69

52

0

10

20

30

40

50

60

70

80

90

Mar '19 Apr '19 May '19 June '19 July '19 Aug '19 Sep '19 Oct '19 Nov '19 Dec '19 Jan '20 CC

% of respondents

Month & Year

Do you think it is likely or unlikely that the soybean trade dispute with China will be settled soon?

Unlikely

Likely

Source: Purdue Center for Commercial Agriculture, Producer Survey, February 2020

CC


Farmers Optimistic About Outcome…Classic Attendees More Uncertain

23 2430 27

1925 25

20 17 2015

20

7771

65 6978

72 72 7580

7281

48

0102030405060708090

Mar'19

Apr '19 May'19

June'19

July'19

Aug'19

Sep '19Oct '19 Nov'19

Dec'19

Jan '20 CC

% of respondents

Month & Year

Do You Think the Trade Dispute with China Will Ultimately Be Resolved in a Way That Benefits U.S. Agriculture?

No Yes


CC


Classic Attendees Less Likely to Expect Higher Farmland Values

13 1115 14 15 13 11

811 11

8 10 11

21

48 47 48

40 3945

5350 49

5357

48 50

41

0

10

20

30

40

50

60

5/17 11/17 2/18 5/18 8/18 10/18 1/19 3/19 5/19 7/19 9/19 11/19 1/20

% of respondentsFarmland Price Expectations, 5 Years From Now

Lower Farmland Prices Higher Farmland Prices


CC


Getting the Most from On-Farm Storage

Neither futures trading nor swaps trading are suitable for all investors, and each involves the risk of loss. Swaps trading should only be undertaken by investors who are Eligible Contract Participants (ECPs) within the meaning of Section 1a(18) of the Commodity Exchange Act. Futures and swaps each are leveraged investments and, because only a percentage of a contract's value is required to trade, it is possible to lose more than the amount of money deposited for either a futures or swaps position. Therefore, traders should only use funds that they can afford to lose without affecting their lifestyles and only a portion of those funds should be devoted to any one trade because traders cannot expect to profit on every trade. All references to options refer to options on futures.Any research views expressed those of the individual author and do not necessarily represent the views of the CME Group or its affiliates. The information within this presentation has been compiled by CME Group for general purposes only. CME Group assumes no responsibility for any errors or omissions. All examples are hypothetical situations, used for explanation purposes only, and should not be considered investment advice or the results of actual market experience.All matters pertaining to rules and specifications herein are made subject to and are superseded by official rulebook of the organizations. Current rules should be consulted in all cases concerning contract specificationsCME Group is a trademark of CME Group Inc. The Globe Logo, CME, Globex and Chicago Mercantile Exchange are trademarks of Chicago Mercantile Exchange Inc. CBOT and the Chicago Board of Trade are trademarks of the Board of Trade of the City of Chicago, Inc. NYMEX, New York Mercantile Exchange and ClearPort are registered trademarks of New York Mercantile Exchange, Inc. COMEX is a trademark of Commodity Exchange, Inc. All other trademarks are the property of their respective owners. S&P 500 and S&P are service and/or trademarks of Dow Jones Trademark Holdings LLC, Standard & Poor's Financial Services LLC and S&P/Dow Jones Indices LLC, as the case may be, and have been licensed for use by Chicago Mercantile Exchange Inc.

Copyright © 2020 CME Group. All rights reserved.

Disclaimer


The United States supplied the world

• Historically the United States was the #1 global exporter of soybeans.

– One out of every three to four rows of soybeans planted in the US was destined for China.• Historically, the United States was the largest supplier of corn.

–Mexico imports almost $3 billion in corn annually, plus products like HFCS and DDGs that are derived from corn.

• Until the last few years, the United States exported more wheat than any other country.

– The Black Sea is now the largest export origin, and South America is growing.– Is the wheat situation portending the future of US agriculture?

US Agriculture


The U.S. no longer exports the majority of the world’s corn

Source: USDA

Corn Exports by Country


South America is not emerging anymore – they are dominantSoybean Exports by Country

Source: USDA


This is what diversification looks like

Source: USDA

Wheat Exports by Country


–As a residual rather than primary supplier to the world, it’s possible there will be more years where the market pays holders to store commodities.

With Change Comes Opportunity


• How does a Commodity Produced One Time per year get Efficiently Allocated Throughout an Entire Calendar Year?

• Futures Contracts have Multiple Deliveries Throughout a Crop Year (e.g., Dec, Mar, May, Jul, and Sep for Corn)

• The Price Spreads between these Different Delivery Months represents the Return From Storage.

• When Supplies are Sufficient, the Spreads are Wide, and the Market Pays Warehouses and Farmers to Store.

• However, when Supplies are Tight, the Market Penalizes Storage.

Efficient Commodity Allocation

Source: U.S. Commodities, Inc.


• Store Unhedged– Face both Price & Basis Risk– Return from Storage is any Rise in Price from Harvest less Storage Costs

• Use Futures and try to Capture “Carry” in the Market–May Eliminate Price Risk but still Faces Basis Risk– Return from Storage is any Improvement in Basis less Storage Costs– Current Market Conditions Provide Clues about Potential Basis Movements

Strategies for Capturing Storage


• Corn Harvest: Oct. 20

• Dec Futures: $4.05

• Basis: $0.30 UNDER

• Harvest Cash Price: $3.75 ($4.05 - $0.30)

• May Futures: $4.20

• Expected May Basis: $0.10 UNDER

• Expected May Cash Price: $4.10 ($4.20 - $0.10)

• Expected Gross Storage Return: $0.35 ($4.10 - $3.75)

Example of Earning a Storage Return


Typical Carry Market – Good Storage Prospects

-100.00

-80.00

-60.00

-40.00

-20.00

0.00

20.00

01 /03 /20 17 02 /03 /20 17 03 /03 /20 17 04 /03 /20 17 05 /03 /20 17 06 /03 /20 17 07 /03 /20 17 08 /03 /20 17 09 /03 /20 17 10 /03 /20 17 11 /03 /20 17 12 /03 /20 17

2017 Toledo SRW Wheat Basis & Spreads (Dec 17 Set to Zero)

DEC 17 SEP 17 JUL 17 MAY 17 MAR 17 TOLEDO

Market Conditions Conducive to Storage

Source: Cash Market Data from USDA


Inverted Markets – Bad Storage Prospects

-60-50-40-30-20-10

010203040

01/02/2019 02/02/2019 03/02/2019 04/02/2019 05/02/2019 06/02/2019 07/02/2019 08/02/2019 09/02/2019 10/02/2019 11/02/2019 12/02/2019

2019 Toledo SRW Wheat Basis & Spreads (Dec 19 Set to Zero)

DEC 19 SEP 19 JUL 19 MAY 19 MAR 19 TOLEDO

Market Conditions Not Conducive to Storage

Source: Cash Market Data from USDA


• U.S. has Become Residual Supplier to the World in Major Grains & Oilseeds

• This Could Result in More Storage Markets

• Storage Markets – Distant Futures Trade at a Premium to Nearby Futures

• Farmers with On-Farm Storage can Participate

• Unhedged Storage – Often More Risky than Hedged Storage, but Potentially still Positive in Carry Markets

• Hedged Storage – Powerful Tool for Reducing Risk and Capturing Futures Market Carry

• To Better Understand using Futures for Hedging Storage – Talk to your Broker or Visit www.CMEGroup.com/agriculture

Key Takeaways

http://www.cmegroup.com/agriculture


Farm Management Strategies in Times of VolatilityWe’re in midst of a plateau in U.S. agriculture…commodity margins will remain tight

Look for ways to add valueWorking capital has declined sharply

Financial management skills will pay dividendsBenchmark key financial ratios against other farms &, over time, against your farm

Become a merchandiser of your crop productionTake advantage of seasonal price strengthImprove your storage returns

capture seasonal increases in basiscapture seasonal increases in futures contract spreads


Think About Opportunities

32

5

38

17

4 3

0

10

20

30

40

No plans togrow

Plan to exit orretire

Less than 5%annually

5 to 10%annually

10 to 15%annually

More than 15%annually

% of respondents

What is a reasonable annual growth rate expectation you have for your farm over the next 5 years?

2/162/172/182/19CC



purdue.edu/commercialagpurdue.edu/agbarometer

purdue 2020farm economypresentation · 1918 1924 1930 1936 1942 1948 1954 1960 1966 1972 1978 1984...

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