In 2016, a tough row to hoe on the farm
A strong dollar, China's slowdown, political upheaval in Latin America and a global grain glut will all combine to make 2016 another challenging year for the American farmer. For 2015, the U.S. Department of Agriculture forecasts farm income will drop 38 percent to $55.9 billion, the lowest in a decade.
This agriculture sector contraction comes after years of robust expansion. According to the USDA, net farm income went from just over $50 billion in 2000 to close to $130 billion in 2013, a nearly threefold increase.
Much of that growth came thanks to a spike in trade with China, to which U.S. farm exports grew from just a few billion dollars in 2000 to a record $29.9 billion last year.
China's subsequent slowdown has had a domino effect on countries like Brazil that have grown increasingly reliant on China as a market for their exports. Now, U.S. farmers find themselves going head-to-head with foreign competitors like Brazil, whose currency has been devalued, which makes its farm products a better bargain on world markets.
But China's realignment isn't the only thing weighing on U.S. farmers' 2016 prospects.
A recent regime change in Argentina has resulted in the emergence of yet another serious global competitor in an already crowded field of sellers with lots of product. For years, Argentina's government discouraged farm exports like soybeans by taxing them. With the recent election of former Buenos Aires mayor Mauricio Macri as president, Argentina is embracing a new free-market approach.
Bob Young, chief economist with the American Farm Bureau, told CBS MoneyWatch Argentina's old taxation policy encouraged farmers to keep their products off the market if possible. "Right now, I bet more than half of the world's stockpile of soybeans is in Argentina," he said. Young believes Argentina's massive inventory puts the country in the position "to be the world's market maker."
Dan Kowalski, chief economist with CoBank, a national co-operative bank that serves the farming sector, said Brazil could also still bring in a record soybean harvest, adding even more product to the global marketplace. Kowalski said successive years of relatively favorable weather conditions around the world have produced record-breaking global inventories for corn, wheat and soybeans.
"We already have a glut of wheat and other commodities," Kowalski told CBS MoneyWatch. "We have shifted from a demand-driven market to a supply market with these record crops."
Both Kowalski and Young said the drop in global oil prices will help U.S. farmers as they aim to cut costs to stay competitive and overcome the handicap of the strong dollar. "It's not only the direct energy costs of running farm equipment," said Young. "We'll see reduced costs for nitrogen fertilizer, thanks to the drop in natural gas prices" because gas is used to make nitrogen.
"No doubt as interest rates go up and commodity prices go down, it will get tougher," Young said. "It used to be you were competing with your neighbor down the street. Now it can be the farmer as far away as China."
"Farm borrowing is up, but the underlying equity and assets are still holding their value," said Kowalski. "We can get through this, but you have to pay attention to every detail."