March 19, 2019

By Michelle Pelletier Marshall, GAI Media

As an economist with Farmer Mac for over 13 years, and in his current role as director of economic research and business innovation, Jackson Takach has seen a lot of ups and downs in the commodity cycle. Most recently, tariffs and trade tensions, not to mention weak commodity prices and the partial shutdown of the federal government have taken their toll on the U.S. farmer and the ag economy.

Takach is a co-author of Farmer Mac’s The Feed (www.farmermac.com/thefeed), a quarterly perspective on ag that incorporates data and analysis from numerous sources to create a mosaic of the leading industry information. The most recent issue, Winter 2018/19, details the sharp decline in soybean exports (off 97 percent to China in the first seven weeks of 2019) and what impact this will have on farm financials for the year, as well as highlights of the national and regional farm debt trends.

Takach will be a speaker at Global AgInvesting 2019 in New York City in early April where he will present Macro View of Investment Opportunities & Return Profiles for U.S. Farmland. GAI News caught up with Takach as he was working on the spring edition of The Feed, which will be provided to conference attendees as an early exclusive.

1. No conversation about U.S. agriculture would be complete without a question about what the U.S. tariffs have done to the ag economy. What are the major effects of this, and more importantly, how do you see this shifting the trajectory of future global commodities trading and banking?

There’s no doubt that in today’s agricultural economy, you simply cannot avoid a conversation about trade, because it’s an increasingly important part of the U.S. agricultural story. We are exceedingly good at making food and fiber, and these foreign markets provide the outlet for the demand for the ever-increasing supply of commodities such as grain, cotton, and proteins. About one in five dollars of U.S. farm income comes from overseas markets. About 30 cents comes from Mexico and Canada, and about 15 cents comes from China. So in 2018 when we started picking at some of our closest trading partners, we jeopardized about one out of every 10 dollars that a farmer takes home, and that’s a lot. It’s a big deal. For the most highly impacted commodities, like soybeans and sorghum, it’s more like three out of every 10 dollars.

Any time you have a government intervention like a tax or a tariff, it takes a while to figure out exactly what’s going to move or change; these things don’t happen overnight. In general, what I expect is that we will continue to see a rerouting of a lot of these goods and services, and consumers will ultimately bear the expense. For example, with Chinese soybean imports, the government controls the importation of soybeans, so when the new tariffs were established they were able to stop buying from the U.S. and buy all of their soybeans almost immediately from Brazil. In the short run, that works pretty well, but in the long run, what you start to see is our soybeans working their way across continents and overseas through interesting paths to other locales, like Vietnam, Southeast Asia, Taiwan, etc. So it might take a little longer, but U.S. soybeans are still going to end up in China’s food supply.

We want to be a reliable, low cost, high-quality trading partner across the globe. Nobody can grow food quite as safely or efficiently as we [the U.S.] can. We’re looking to get past these issues with China and get into some new trade agreements with the EU and Japan. In the long run, I think we are going to be ok; in the short run there could be a little bit of a disruption of how we do business.

2. What has this trade realignment done to the state of farm financing? What type of actions are you seeing in producers and other stakeholders to counter this shift?

So far ag creditors have been patient and pragmatic with farm customers. If you look at data put out by the FDIC and the Farm Credit Administration that look at primary lenders like commercial banks and Farm Credit System institutions, they continue to extend more credit. There was roughly five percent growth in debt outstanding from Farm Credit System institutions and commercial banks from 2017 to 2018, and more of that is coming on the land. They may be not extending as much on operating, but more people are able to take out additional dollars on the real estate. We see this as a long-term trend.

Producers have been patient with the Trump administration as well as with some of the tariffs. A lot of them, particularly in the Midwest, are staying their course. Some are switching to more consumer goods, like edible beans or yellow peas with the advent of pea milk. In general, if you look at the early projections from the USDA, soybeans are expected to be down, but nowhere near what I would have expected producers to change given what has happened to soybeans this past year. Now if you go out west, it’s much harder to change crops if you have permanent plantings like orchards and vines, so it’s difficult to change track for western growers. If they see stronger headwinds from tariffs, they have to live with them for at least a couple of years before they can change into something else.

3. The Wall Street Journal reports that throughout the Midwest, U.S. farmers are filing for Chapter 12 bankruptcy protection at levels not seen for at least a decade. Does Farmer Mac concur and what will be the repercussions of this?

There have been a lot of headlines around farm bankruptcies and farm performance. Our next issue of The Feed, due out at the end of March and which will be available as an early-exclusive at GAI New York, will feature an article from researchers from the Ohio State University who looked at the counts of farm bankruptcies across the years from 2005-2018. The number nationwide is actually down in 2018, so some of the headlines are a little bit misleading. For example, in Minnesota, there were seven more Chapter 12 bankruptcies in 2018 than 2017, so they went from 13 to 20. Not to downplay the seriousness of farm bankruptcies, which are devastating and heartbreaking, but there are 73,000 farms in Minnesota, so seven is not the soaring number that people think of when they read a headline. Yes, they [bankruptcies] are increasing in certain areas but it’s a very small number. Also, bankruptcies tend to be a lagging indicator, not a leading indicator, so that’s not the number I look at when I’m examining stress in a system. I look to delinquencies and late payments, and are farmers leaning on the government to increase programs and assistance? And the answer to those questions is not yet.

There has been a lot of negative press around the performance of agricultural finance, and I encourage people to take a look at the data for themselves and judge how dramatic these increases are. Certainly every bankruptcy is a sad one, but it’s not so pervasive that we are talking about the 1980s again.

4. Trade talks between the U.S. and China often result in Chinese orders for U.S. soybeans, however, these orders are frequently canceled later. How do you see this dynamic progressing?

Personally, I am an optimist in our ability to navigate these waters, and I think that we are all motivated – the U.S. and China – to find a positive outcome because right now it’s pretty bad for all parties. The harder it gets for the Chinese trade delegations with food price inflation and a slower economy, the more pressure there is to cut a deal with the U.S. Conversely, there’s pressure on the current administration through economic indicators such as stock market volatility, and from farmers and fishers who are voicing more dissent with the way things are going with the trade negotiations. I’m hopeful that both sides can find some common ground on the Chinese-U.S. trade dispute, but we will all have to wait and see how it plays out.

5. U.S. farmers have received $7.7 billion in government aid so far to offset the trade war. To what extent can this sum offset the loss of trade for U.S. producers?

So far there’s about $8 billion – and I think there will be more – that has gone out in cash payments to farmers for their 2018 production. That’s a huge amount of money and is incredibly helpful. Certainly it’s a valuable offset to some of the disruptions that came from the trade disputes. It’s about 8 percent of take-home pay for farmers so it’s very helpful for them and the lenders alike. And with most loan payments due on January 1, this money couldn’t have come at a better time.

6. It’s not all bad news though, certain markets, such as India for almonds, are expanding trade relations with the U.S. What other markets or geographies do you see heating up for U.S. ag opportunities?

Asia is a huge growth opportunity for U.S. agriculture. India has always been a little elusive because they try to grow all their own food and keep it within their borders, but we have USDA representatives there every year working to unlock trade partnerships.

But if you look at Vietnam, South Korea, and Thailand, these are great economies with growing demand for U.S. ag, particularly beef, pork, and poultry. We should continue to see growth in Asian economies outside of China. We are working with Japan to unlock more value, and TPP would have been a wonderful trade agreement to be a part of and there is still some interest in that, or creating bilateral agreements with other Asian countries.

There also are opportunities in the EU and Africa where we are sending more soybeans to the Netherlands, Spain, and Portugal. And Africa always has a lot of opportunities. Egypt’s booming tilapia industry relies on our soybeans for meal as feed, and in fact we have seen our soybean sales to them quadruple in the last year.

7. What do you see for the future of land prices? Is ag still a good investment that is poised to bring returns?

Personally, I firmly believe that agriculture will continue to be a sound investment in a lot of avenues, particularly land. Every industry is going to face ups and downs; that’s why they are called business cycles, but we have to remember context because we compare ourselves to 2013-2014 which was a time of incredible, super-normal growth. If you are always going to compare today’s returns to the best periods in the industry, it’s going to be a difficult comparison.

In the long run, the fundamentals are strong for agriculture, including U.S. ag. Much of this has to do with an increasing population globally, improving economics globally, and a thirst for safe, high-quality, and reliable sources for food – and nobody does that better than the United States. It’s going to take generations for other food producers to catch up to the advances that we have over our competitors. Even though we may hit a few bumps along the road, and we may be in one of those potholes right now, I still believe that the road ahead is really bright for U.S. agriculture.

ABOUT JACKSON TAKACH

Jackson Takach, an economist and director of economic and business innovation with Farmer Mac, is a Kentucky native whose strong ties to agriculture began while growing up in the rural town of Scottsville. He joined the Farmer Mac team in 2005, and has worked in the research, credit, and underwriting departments. Takach is the lead author and creator of “The Feed”, Farmer Mac’s quarterly publication on the agricultural sector, and he regularly presents to lenders, producers, and industry experts throughout the year. He holds a bachelor’s degree in economics from Centre College, a master’s degree in agricultural economics from Purdue University, and an MBA and a master’s degree in finance from Indiana University’s Kelley School of Business. He has also been a CFA charterholder since 2012.

ABOUT THE AUTHOR

Michelle Pelletier Marshall is managing editor for Global AgInvesting’s quarterly GAI Gazette magazine and a regular contributor to GAI News. She can be reached at mmarshall@globalaginvesting.com.