The 2021 Agriculture Sector Report

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Jack Henry Lending | The 2021 Agriculture Sector Report

The consumer spending graphic below, from tracktherecovery.org, would have been hard to imagine heading into 2020, but it happened. The blue line represents overall spending in the US during the economic shutdown in response to COVID-19, which had fallen by more than 30% by mid-April. The green line represents spending in one specific category – groceries – which had exploded with an increase of 74% in mid-March. In one picture, this graphic tells much of the story of the challenges faced by the agricultural sector during the first half of 2020 in terms of supply chain management and overall output. The entire system of agricultural as well as non-durable goods was upended when the shift in consumer spending occurred. The food delivery system changed dramatically as restaurants closed dine-in services and then shifted to take-out, and as consumers began to purchase, and in some cases, stock up heavily on both perishable and non-perishable grocery items.

Prior to last year, the agricultural sector was looking hopefully at 2020 as a year that might be better than previous years. The US had announced a Phase I trade deal with China and the USMCA had been executed, clarifying trade relationships between the US, Mexico and Canada. Then came mid-March and the economic shutdown. Unlike many other industries, food and grocery purchases expanded and shifted to in-home purchases and away from in-restaurant and in-school consumption. This was, and still is, logistically challenging for anyone associated with the agricultural delivery chain.

The 2021 Agriculture Sector Report

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Within the next few pages, we will take a closer look at agricultural production in our country and evaluate the challenges and opportunities faced within the industry. Like so many issues within the current pandemic environment, there is continued uncertainty. But the importance of this economic sector to the average American is second to none. This is a segment of the economy we all rely on for our survival. We’ll begin with a general overview of US agriculture and move from there into a review of how the outlook is shaping up for the remainder of 2021. Overview of US Agriculture It would be hard to overstate the importance of the agricultural sector to the US and to world trade. Most lenders know that this market drives our country forward. As the American financier Bernard Baruch famously stated in the mid-20th century, “Agriculture is the greatest and fundamentally the most important of our industries. The cities are but the branches of the tree of national life, the roots of which go deeply into the land. We all flourish or decline with the farmer.” The events of 2020 surrounding COVID-19 have only amplified the importance of the industry to the consumers in America and around the globe. While the pure economic impact on the economy may be less now than during Baruch’s life, agriculture remains critical to our way of life, especially in rural America – a market served primarily by community banks and credit unions. In order to grasp the size and scope of the sector, it may help to keep in mind a few key statistics from a recent article in Business Insider and a few other sources.

• Agriculture supplies more than $1 trillion dollars to the US economy each year. While farming directly contributes approximately $130 billion, other related industries make up the rest. Worldwide, farming contributes about $4.4 trillion with major crop and animal producers being China, the US, Brazil and India.

• There are about two million farms in the United States, while farmers and ranchers make up just over 1.3% of our labor force. This statistic reveals the changes the industry saw in the 20th century. At its peak in 1935, there were more than seven million farms. In the mid-nineteenth century, 70% of the nation’s workforce was employed in farming.

• About 87% of US agriculture products sold are produced on family farms and ranches. • The USDA estimates that extreme weather is the cause of 90% of crop losses in the US. • About 41% of the contiguous US states (800 million acres) are used to feed livestock. A recent

study by Bloomberg estimated that 71 million acres is used to grow the food we eat. • The local food movement nearly doubled from 2014 to 2019, exceeding $20 billion. • First Research predicts and average compounded growth rate of just over 4% in US

agriculture sales annually between 2020 and 2024. • The top three US farm products are cattle, corn and soybeans. • On average, one US farms feeds about 166 people domestically and around the world. • Roughly 60% of the US soybean crop prior to 2019 was sold to China. • The peak of soybean production was reached in 2018, with nearly 900 million bushels.

Before going further, it may help to describe the industry in terms of farm size. Most US farming operations are classified as family farms. In nearly half of these, the operation also relies on off-farm income to make ends meet, not to mention health insurance. Below is a breakdown of farming in the US by gross cash farm income (GCFI) using data from the 2019 USDA publication “America’s Diverse Family Farms.”

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Source: America’s Diverse Family Farms, a USDA publication

The USDA map below reveals the widespread footprint of the sector across America, where each blue dot represents 200 farms.

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Commercial Lending in the Agricultural Sector As of the latest call reports, US banks held $75 billion in farm loans. Of this number, banks between $100 million and $1 billion in assets held $33.6 billion. Loans secured by farmland totaled just over $104 billion, with $52 billion held by banks between $100 million and $1 billion in assets. Total lending in the agricultural sector, however, is much higher since it includes other sources of commercial loans. While there are more than 30 related sectors, here is a sampling of a few that are often seen by commercial lenders. Farm Support Services (NAICS CODES: 11511, 11521) Farm support services in the United States represents about $15 billion in annual gross revenue from just under 9500 establishments. These are businesses that act in support of farming operations but do not themselves own farmland, grow crops or raise animals for consumption. Agricultural Machinery Manufacturing (NAICS CODE: 333111) The market for agricultural machinery in the US currently stands at about $23 billion and represents nearly one thousand companies. We all think of companies like Deere & Company as well as AGCO in the US, but there are also major players in other countries, such as Kubota in Japan and CNH Industrial in the Netherlands. According to First Research, this market is forecasted to grow at an annualized rate of 2.5% to 3.0% between now and 2025, reaching about $130 - $140 billion worldwide. Farm & Garden Equipment Wholesale (NAICS CODES: 423820) The farm and garden equipment wholesalers in the US include about 7,800 establishments with combined annual revenue of about $88 billion. These companies distribute farm and lawn equipment and other related parts. The worldwide market is currently sized at about $280 billion in revenue and expected to grow at an annualized rate of 8 to 9% in the coming years. Of course, in addition to the US, both Europe and China are large producers within this industry sector. Grain Farming (NAICS CODES: 11114, 11115, 11116) This sector is represented by farms that grow wheat, corn & other feed grains, rice and seeds. In the US, the sector contains about 350,000 farms with annual revenue of approximately $65 billion. Worldwide, the sector comes in at more than $475 billion. The US is the largest producer of corn, while India and China are the largest wheat producers. In any given year, the US exports 10 – 20% of its corn production, according to the USDA. In the years to come, demand for grains is expected to increase, especially in countries where populations are increasing dramatically. Biofuel Manufacturing (NAICS CODES: 325193) Businesses in this sector produce ethanol, biodiesel and renewable hydrocarbon “drop-in” fuels. While global sales fall in the range of $175 billion annually, this sector is expected to grow to over $250 billion by 2025. In the US, there are over 200 biofuel manufacturers with combined annual revenues of just over $30 billion.

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Credit underwriting in the agricultural sector often requires a special skill as well as an understanding of collateral values, cash flows and repayment terms. One key challenge is the fact that family farming operations are so closely interwoven with the personal incomes and assets of the farm owners. This requires a keen understanding of the industry when performing credit tasks such as spreading historical financial statements. The fact that farm operations are so heavily impacted by conditions such as weather, government stimulus efforts and world trade fluctuations add another layer of complexity. Employment and Compensation The US Bureau of Labor Statistics (BLS) reports that there are currently about 975,000 farmers, ranchers and other agricultural managers. You might recall an earlier statement that there are roughly two million farms in the US. How does this square up with the BLS numbers? Remember from the earlier table that the USDA reports more than eight hundred thousand farms have a principal owner who maintain an occupation other than farming. Another 250,000 farms are considered retirement farms, still in operation but the principal owner is listed as retired. For more detail, see the off-farm income below. On average, this group earns about $68,000 annually in farming related income. The number of these jobs in the US is expected to remain close to the same between now and 2028. The other primary employment group is agricultural workers themselves. BLS estimates that there are just over 875,000 of these individuals in the US earning an average of just under $25,000 annually. This group is forecasted to expand by about 10% between now and 2028. Other sector employment includes agricultural engineers, food scientist and more, but their numbers are far lower. Overall employment is not as high as one might expect but remember that the American farm has become much more mechanized through the 20th century. In other words, the industry has come a long way since 1935, when there were seven million farms. As mentioned above, it is also interesting to note that more than 40% of small family farms in the US rely on non-farm income to support their operations. According to the USDA, “Historically, most farm households report a loss from their farming operations and rely on off-farm income sources for both on-farm and off-farm needs. Off-farm income is generally more stable and aids in managing farm risks. However, as the pandemic increases risks associated with farming, it also increases risks off the farm.” The graphic below shows the typical sources of non-farm income.

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For a little more detail, the following graphic shows off-farm work listed by farm type, with the average being 45% across all categories. While these are dominated by those farms listed as “off-farm occupation,” other farm types also have principal owners and spouses supporting farm operations with outside income.

Note: Spouse percentages are calculated among those households with a spouse present.

Source: USDA, Economic Research Service and USDA, National Agricultural Statistics Service, 2018 Agricultural Resource Management Survey Organizational Structures Most family farms are listed as sole proprietorships, both in terms of production volume and organizational structure.

Note: “Other” includes estates, trusts, cooperatives, grazing associations, etc.

Source: USDA, Economic Research Service and USDA, National Agricultural Statistics Service, 2018 Agricultural Resource Management Survey

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Production Metrics The graphic below takes a closer look at commodity production by farm type. For example, notice that small family farms produce most eggs and poultry while large scale farms dominate the production of dairy, high-value crops (fruits, vegetables, nuts) and cotton.

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Operating Profit Margins by Size Class In general, smaller farms tend to struggle more financially than larger operations, thus the reliance on off-farm income.

Trade and Legislative Impacts for 2020 The combination of the 2020 pandemic, trade disputes and weather impacts in the US have created significant pressure on domestic farmers in recent years. The phase one trade deal with China in 2019 and the resulting de-escalation of tariffs was expected to have a positive impact in 2020 before the pandemic disruption, especially as it relates to soybean production and prices. The passing of US-Mexico-Canada Agreement (USMCA) should also create new opportunities for farmers in the years ahead. Mexico is the largest export recipient of US beef.

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A Review of 2020 Economic Impacts Prior to March 2020 and the onset of the economic shutdown, there was a general sense that 2020 would be a better year for the American farmer than the three previous years, for reasons stated above. While demand, especially domestically, has been strong, the challenges of the pandemic have been associated with supply chain, packaging, distribution and employee health impacts. Seismic shifts in consumer preferences away from in-school and in-restaurant consumption have had wide ranging impacts on the industry. The events of 2020 also caused an increase in food prices in the US market. The overall rate of increase from mid-2019 to mid-2020 was about 5.6%. As already mentioned, the pandemic disrupted supply chains for most products. It also caused well publicized plant shutdowns that impacted the price of beef, poultry and other meats. To put this in scale, just consider the impact on dairy. On a dime, the industry had to shift from a market that was heavily reliant on deliveries to schools and restaurants and turn to one that relied almost exclusively on in-home consumption. That impacts delivery chains, transportation, packaging and more. Of course, many of us saw milk and other dairy products disappear from the shelves for a period until the market could catch up with demand. These challenges are unprecedented, at least in most of our lifetimes. The graphic below shows the average price increase that resulted from 2019 to 2020.

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The next three graphs show just how dramatically various agricultural markets were impacted in the first half of 2020. The first reveals the extraordinary drop in beef exports, when compared to prior years, due to the economic shut-down in the US and other countries.

This next graphic shows how milk production was impacted, with sharp declines in April and May when the industry would normally be expanding.

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In these final two graphics, we see the impact of the pandemic induced shut down on egg, chick and turkey production. As sharp as the decline was, also note the strong recovery. After all, consumer demand remains strong. Those looking for a V-shaped recovery may indeed find it in the agricultural sector.

Lending in the Agricultural Sector There are approximately 930 banks in the US that carry the “agricultural specialist” designation. These institutions account for about 65% of lending in the sector, as can be seen from the graphic below. The expectation for 2021 is that loan demand will increase across the board as economic conditions recover further.

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The 2021 Forecast Cash receipts are expected to increase or remain level in most major ag sector categories during 2021. The graphic below shows the latest USDA forecast for selected crops.

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The same is true for animal product production, as seen in the following graphic.

While cash receipts are expected to increase, net farm incomes are forecasted to decline somewhat due to reduced federal aid as compared to 2020 pandemic measures as well as increased production expenses across the board. The production expense forecast is shown below.

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The forecast of government aid and sources is shown here:

Note that while net farm incomes are expected to be lower than those in 2020, they are still higher than any other year since 2014.

Summary There is a rich history of farming in our country that spans thousands of years, with the first natives that inhabited North America. If there is one word that describes the underlying nature of the American farmer, it would be “resilience.” Throughout our history, farmers have earned the respect of the general population that they feed. Along the way they have faced every weather and economic condition imaginable. COVID-19 is simply another in the long line of challenges they have endured. The family farm did indeed rise to the occasion and weather the events of 2020. In the words of Will Rogers, “The farmer has to be an optimist, or he wouldn’t still be a farmer.”

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The 2021 Agriculture Sector Report

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