American farmers grapple with falling prices and sinking incomes

 

A CALM USUALLY descends on America’s farm belt in November. Combines have mostly finished churning across fields; trucks have hauled crops to grain elevators; and farmers retreat to their living rooms to rest. This year, at least by one measure, they should feel particularly content. Randy Sims, a hog-and-grain farmer in western Illinois, produced 75 bushels of soyabeans per acre, a third more than in the past. Indeed American soyabean production in 2018 is expected to reach 4.69bn bushels, a record. But it is unclear who will buy them.

America’s farmers are at the centre of President Donald Trump’s trade war. More than a fifth of agricultural exports face new tariffs. From January to September pork exports to Mexico and China fell by 31% and 36%, respectively. Sales of soyabeans, America’s biggest farm export, to China have plunged by 98% since January (see chart). “It’s a big concern,” says David Williams, who farms 3,800 acres in Michigan. He flew to Shanghai for a conference in early November with a group of soyabean growers keen to maintain ties with Chinese importers, in the hope that the trade standoff ends soon. In the meantime America’s agriculture department expects farm incomes to drop by 13% this year. The ratio of farm debt to assets is forecast to rise to its highest level since 2009.

It is all reminiscent of the 1980s, when America suspended grain sales to the Soviet Union, interest rates rose, incomes sank and many farmers left the business. For now debt levels are climbing but still manageable. But much depends on how long tariffs persist. By the time the trade war ends, they may have caused enduring harm.

American farmers are titans of international commerce. From 2000 to 2017 the value of agricultural exports nearly tripled. Exports comprise more than a fifth of farm output. Grain gushes abroad in the highest volumes. As the world eats more meat, livestock producers need more animal feed, raising demand for soyabeans. Exports last year reached $ 21.6bn, more than double the value of corn, the next largest export.

These successes are due in part to government subsidies that incentivise production, such as farm payments that rise when commodity prices fall. These mainly support big operations: farms with incomes of $ 167,000 or more received nearly 70% of commodity payments in 2016, according to the Heritage Foundation, a think-tank.

Productivity-boosting measures have helped, too. Mr Sims, for instance, now uses data on yields to fine-tune the application of fertiliser. He flies drones to inspect crops for insect damage. Farmers often coat seeds before planting to fend off rot and pests. Environmentalists worry about the impact on water and biodiversity. But production has boomed.

This has helped depress prices for corn and soyabeans in recent years, even as land, fertiliser and seed have remained relatively expensive. So a trade war is particularly ill-timed. Mr Trump announced tariffs on steel and aluminium imports in March, and extended them to Mexico, Canada and Europe in May. In retaliation Mexico, the second-largest importer of American pork by value, raised tariffs to 20%. China’s tariffs of up to 70% on pork, and 25% on soyabeans, hurt even more.

Mr Trump is due to meet Xi Jinping, China’s president, at the G20 summit later this month, but neither man may concede much. In September Mr Trump agreed on a new deal to replace the North American Free Trade Agreement with Canada and Mexico. But it does not affect America’s tariffs on steel and aluminium, so Mexico’s pork tariffs remain in place. Indeed Canadian and Mexican retaliatory tariffs wipe out the modest gain in exports from the new deal, according to analysis from Purdue University, leading to a $ 1.8bn net loss in farm exports.

When one export market shuts, it can be hard to divert goods elsewhere. Pork, for instance, can be transported to Mexico in refrigerated trucks. It is more expensive to freeze and ship it across an ocean.

Soyabean farmers fear that demand and trade flows will shift permanently. China’s appetite for imports would wane if producers lower the soya protein in pig feed or if, as some traders fear, the government urges consumers to switch to chicken or beef, which require less soya than pork does. What demand remains may increasingly be met by Brazil and Argentina. Wallace Tyner of Purdue University estimates that Brazil has another 9m acres of farmland that it could convert to soyabeans relatively quickly. “The market loss that we face in the short run really opens the door to competitors,” says Jim Sutter of the United States Soybean Export Council.

The price of American soyabeans is now depressed, compared with that of Brazilian beans. Many farmers must accept an even lower price than that published on the Chicago Board of Trade, as elevators struggle to store and transport grain for which there are few buyers. Mr Williams has had to sell his soyabeans at a discount. In North Dakota, which usually sends soyabeans to ships in the Pacific Northwest, some elevators have stopped buying them altogether.

Economists at the University of Illinois expect the average farm in central Illinois to make an overall loss of $ 70,000 next year. A recent survey from the Kansas City Federal Reserve found that farm lending from July to September was a third higher than in the same period last year. Most of the increase was not to buy new machinery but to support the basic business of farming. Farmers may plant more corn next year, rather than soyabeans, but that is not a permanent solution. Continuously planting corn, rather than rotating crops, lowers yields.

In 2015, 51% of output came from farms with sales of at least $ 1m, compared with 31% in 1991. The trade dispute may speed consolidation. Bigger farms have more cash to invest in yield-boosting technology and the scale to win better terms from buyers. Mr Sims is one of many large farmers to invest in bigger silos, in order to store crops while waiting for better prices.

The government may also become even more involved in agriculture, to muddled effect. Mr Trump, having disrupted global trade flows, is now using $ 12bn of taxpayers’ money to offset some of farmers’ losses. Concern for their welfare may buoy support for a new farm bill—but the version favoured by Republicans in the House of Representatives would make even richer farmers eligible for payments. Mr Sims is hopeful that Mr Trump will win better trade terms for farmers. “I am willing to weather the storm,” he says. But by the time the president strikes a deal, whatever it is, American farming is likely to have become less competitive and more distorted.

This article appeared in the Finance and economics section of the print edition under the headline “Tough row to hoe”