Farm economy outlook depends on new trade agreements, evolution of disease outbreaks; FAPRI releases Annual US agricultural market outlook report

The outlook for the United States farm economy depends on the implementation of new trade agreements and the evolution of animal and human disease outbreaks, according to the latest analysis of national and global agricultural trends from the University of Missouri.

While net farm income increases in 2020, under a baseline assumption of continued trade friction with China, other indicators of the health of the farm economy are not as positive. However, there is a scenario that incorporates the “Phase 1” trade agreement between China and the US that suggests the possibility of a stronger outlook for US commodity prices and farm incomes. Those results are highly dependent on specific assumptions about how the agreement will be implemented.

“Macroeconomic assumptions are based on January forecasts by IHS Markit, which suggested moderate growth in the US and global economies at that time,” said Patrick Westhoff, director of Food and Agricultural Policy Research (FAPRI) at MU. “Those forecasts were prepared before much was known about the severity of the coronavirus (COVID-19) outbreak and before recent declines in stock market prices and interest rates.”

Economists with FAPRI and the MU Agricultural Markets and Policy (AMAP) team release the annual US Agricultural Market Outlook report each spring. The baseline projections for agricultural and biofuel markets were prepared using market information available in January.

The full US Agricultural Market Outlook is available on FAPRI’s website.

This year’s baseline assumes that China’s retaliatory tariffs on US farm products remain in place and limit bilateral trade. Economists with FAPRI alternatively explored one possible outcome of Phase 1 implementation, which assumes US exports are exempt from those retaliatory tariffs and that China takes other steps to facilitate trade between the two countries. This Phase 1 representation is just one of many ways the impact of the agreement could evolve.

“Details on the contents of the Phase 1 trade agreement remain unknown,” said Seth Meyer, FAPRI associate director. “The agreement indicates that China should increase its imports of US agricultural products. With limited information, our economists developed a scenario that assumes China takes some steps to facilitate greater imports.

“The scenario represents one possible implementation by the two sides. Many other outcomes and commodity mixes are possible. As we learn more about how the agreement is being implemented, we expect to conduct additional analysis of the market implications.”

FAPRI’s projections show that with an assumed return to normal planting and growing weather in 2020, there will be an increase in projected area, yields and supplies and lower prices for corn and soybeans in the 2020/21 marketing year. With trend yields, 2020 corn production increases to 15 billion bushels, putting downward pressure on prices, which are projected to average $3.57 per bushel. With soybeans, an increase in production drops prices to $8.48 per bushel, before considering the possible impacts of the Phase 1 trade agreement.

African swine fever (ASF) will continue to have a large impact on the global commodity markets, with China’s pork production declining sharply again in 2020 and only beginning to increase after 2021. This provides an opportunity for increased meat imports by China, but reduces global demand for soybean meal and other feeds.

Projected cattle prices will increase beginning in 2020 as exports increase and cattle inventories decline after five years of expansion. Westhoff notes that the COVID-19 outbreak is likely to weaken the price outlook for the cattle market and for many other commodities, especially in the short run.

“Given the assumptions of the baseline, net farm income will increase to $99 billion in 2020, but net cash income declines,” Westhoff said. “The difference in the two measures is largely due to how the two measures handle inventory changes. Farm debt-to-asset ratios will continue to increase, reaching 13.6 percent in 2020 and 15 percent by 2025.”

The US Agricultural Market Outlook is prepared annually by economists with FAPRI and AMAP and is updated each August. Westhoff said the report gives policymakers, farmers, agribusinesses and the public an overview of the state of the US farm economy. The market projections it contains can be useful to farmers making production choices, to policymakers trying to decide how to respond to agriculture issues, to lenders who must decide whether to make loans and to agribusinesses making investment decisions.

“The information is meant to serve a variety of purposes,” Westhoff said. “It’s a broad-brush, big-picture look at agriculture. Our goal is to give a general view of what the next 10 years might look like. The baseline can then serve as a benchmark for looking at alternatives, such as how the Phase 1 agreement or COVID-19 might affect the outlook.”