About This Episode
Recorded at the end of December 2020, Shay Foulk asks Dr. Gary Schnitkey of the University of Illinois how the year actually landed. Livestock took the hit, with dairy, pork, and beef all hurt as production disruptions hit their markets and prices. Grain farms looked poor early, but federal aid through CFAP, a strong price rebound, and good Illinois yields left most operations with income above 2019. Foulk adds that federal payments accounted for roughly 30 to 35 percent of gross farm income.
Schnitkey frames the gain as catch-up rather than a windfall. Income years since 2013 have been low, so a strong year mostly restores lost ground, and Foulk says consulting clients are only now being made whole after four or five hard years. Schnitkey's advice into 2021 is to get some grain priced rather than hold it all, and to reinvest where it raises profitability: tiling, grain storage, and other farm-specific improvements that carry margin forward.
On interest rates he does not see a near-term rise, because federal deficits only work while borrowing stays cheap and the Fed has every incentive to keep it that way. He suggests fixing debt long term while that is available, while admitting the same call has been wrong for ten years. On land he is cautious about buying but firm about not selling. On policy, he expects climate and environmental pressure to grow, with possible payments tied to climate mitigation.
“Since 2013, we've had some lower income years, and we need some higher income years just to keep us where we're at.”
— Dr. Gary Schnitkey
Key Takeaways
Dairy, pork, and beef all had a poor 2020 on production disruptions; grain farms finished above 2019 on federal aid, rebounding prices, and good Illinois yields.
Federal payments made up roughly 30 to 35 percent of gross farm income in 2020, and Foulk says that mostly makes operations whole after four or five lean years.
Schnitkey's first move for 2021: get some grain priced at these prices rather than holding all of it.
He does not expect interest rates to rise soon because federal deficits depend on cheap borrowing, and he suggests fixing debt long term.
Take some of the income and improve the operation, tiling and storage among them, rather than only banking a good year.
At recording, cash corn was $4.52 and soybeans $12.50, prices Foulk had not seen outside a brief stretch in 2019.
Full Transcript
Shay
Foulk: And it all comes down to this. 2 on, 2 out, bottom of the 9th. The Farmers lead by 1. Full count, here comes the play at the plate, and it's the Ag View Pitch! Welcome back everyone to another episode of the Ag View Pitch, and today you have Shay Foulk with Dr. Gary Schnittke from the University of Illinois. How are you today?
Dr.
Gary
Schnitkey: I am well, I'm well, Shea.
Shay
Foulk: It's been a pretty good end of the year wrapping up, able to see some family and friends, so we always enjoy that. But wanted to have a quick conversation here for the farm listeners out there, just a little perspective on what you've kind of seen in 2020, how it's looked relative to the last couple of decades as a production year, and then do a forecast or a look ahead into 2021. So we'll get started with that.
Dr.
Gary
Schnitkey: All right, sounds good. Well, 2020 was a, was a, an interesting year. Let's just say that after COVID-19 control measures hit, we were very concerned about, uh, prices and the resulting profitability that, uh, that would happen. Livestock farms had a poorer year. Dairy, pork, beef, all of them had got hit hard, particularly as production disruptions hit their markets hard and resulting prices. Grain farms looked poor, but the, but the amount of federal aid that has come through CFAP, and now another round looks like it's coming forward as a result of this recently passed legislation, and prices have rebounded really well. So 2020, with those stronger prices, Overall, pretty good yields in Illinois, less so in Iowa, but pretty good yields in Illinois.
We're looking at reasonably good incomes in 2020 with, with probably most farms having incomes above last year, and overall that federal aid and those higher prices have helped us quite a lot.
Shay
Foulk: So we've all heard the numbers there, federal aid accounting for anywhere from 30 to 35% of gross farm income in 2020, and we've seen that kind of across the country in areas where producers were able to capitalize on both yield and pricing, as well as some of these federal payments. What we're starting to see on the consulting side of the industry is farms are just now kind of being made whole. You know, they had a real good year, but when you look at the last 4 to 5 years, it's actually just kind of making them whole again. But with good fieldwork conditions in the end of 2020 here, we had some, some real good weather pretty much throughout the Midwest, a little dry in some areas. I know there's a lot of farm operations out there hoping for moisture, whether in the form of snow this week or, or rain as we move into spring. A lot of optimism out there.
One thing that I wanted to touch on briefly with the profitability that we saw in '21, as far as that profit management and how this year looks compared to, to years over the decades, what might be some key factors and considerations, especially with all of the craziness that we have going on right now as we move into 2021? In particular,— looking at inflation, interest rates, where they are historically. What are some of the key things producers should be thinking about?
Dr.
Gary
Schnitkey: Yeah, that's a good question, and you're absolutely right. Since 2013, we've had some lower income years, and we need some higher income years just to keep us where we're at. 2021, I guess the first thing you would want to think about is what you're going to do with these prices now. And Setting some, some selling some grain probably isn't a good, isn't a bad idea. I mean, we've had prices above where we thought they were. I don't know exactly where they're going to go from here, but, you know, being, getting some of that priced would, would be a good thing. I personally do not see interest rates rising in the near future because we're going to have a pretty accommodative policies moving forward as far as interest rates.
You know, if I were a farmer and, don't sell land, that will likely be a good asset moving forward, and while you wouldn't say now is the right time to buy farmland, you might consider it because there's, if you look at the assets that are out there, there's nothing I mean, do you want to go in the stock market? Do you want to go into, um, these very low interest rate environments? So maybe think about land if you're, you're moving forward. I would say if you have the opportunity, do anything that you can to enhance profitability on that operation, where that might be tiling farmland, it might be improving storage on that facility, it might be— and it obviously all those things are farm-specific, but, you know, take, take some of the income that we had and maybe improve in the operations so that we have profitability, more profitability moving forward.
Shay
Foulk: We've had many farm operations this year talk about, and in different regions talk about, you know, we farm for the 3 years out of 10 or the 2 years out of 10, depending on where you're located, depending on your industry. As commodity producers though, that can be very, very true. So what I hear you saying is take advantage of this opportunity, make some of those improvements, continue to invest in the business. One thing that I want to look at and go back to real quick is on those interest rates. There's, there's different conversations on that, so why do you feel that that's not a concern as we move forward here? Can you elaborate on that a little bit more?
Dr.
Gary
Schnitkey: Well, it will be a concern in the long run, but I think is, is we're looking at the short run. Federal policy administrators have a vested interest in keeping interest rates low. The minute those interest rates go up, we are going to have huge problems with federal deficits. We've just, we just put another couple trillion on our debt with the recently passed aid bill. Those things only work if we have low interest rates. And so the Federal Reserve and others are going to be pushing to keep those interest rates low as long as we can. And, you know, I don't see anything that's going to break those in this year. You know, again, if you're looking at opportunities, one of the things you might consider if you have debt is to fix it or fix it on long-term interest rates. Having said that, we said that for the last 10 years and we were wrong for the last 10 years.
So I guess I, you know, I just don't see the breaking point yet for interest rates. It will come, but probably not in this next year or so.
Shay
Foulk: It's hard to continue to print this amount of money and not have repercussions down the road. And hopefully over the next, you know, 3, 4, 5 years or longer term, we can manage that appropriately so that we aren't put in a real tough position later on. But I agree, there's a lot of opportunity out there. A lot of things to take advantage of. One thing that I wanted to touch on quickly as well is going back to the livestock side. So tough year in 2020. That's a, that's a pretty national thing that we've seen. It's not regional. How does the outlook into 2021 look, and have any of the disruptions that we saw as part of the pandemic been solved? Are there any solutions out there, or are we just kind of 'Well, we got through this hiccup. Let's keep doing things as we were doing them.' Yeah, you know, one thing that I would—
Dr.
Gary
Schnitkey: and this isn't for the farm audience necessarily, but, you know, the agricultural system performed pretty well during this pandemic. You know, no one, um, really— I mean, the livestock side, we had shortages of meat in certain cases, but, uh, it wasn't widespread. We, we did, did pretty pretty well. You still get concerned obviously on the livestock side, the increasing concentration amongst the packing industry, and that's not going to go away. So we continue, continue have to having to deal with that. But you know, if you're looking forward, what has largely got our commodity prices, our corn and soybean prices up, has been growing export demand. So if we can continue that growth and get more meats out there, that, that is an opportunity. Mm-hmm.
Shay
Foulk: One thing on the policy side, as you talk about, these conversations have way more to do than just with the farm audience. And I think sometimes we're guilty of, uh, telling ourselves the same story over and over or talking at each other within the agricultural community. And sometimes we don't realize how much we're influenced by all the legislation and others who are making these decisions in the agricultural community. So is there any policy or legislation or things in the works out there that farmers should be aware of or be thinking about as we move into 2021 that could significantly impact agriculture as we move forward?
Dr.
Gary
Schnitkey: Yeah, one would expect, and this, this is an open question, obviously as we're moving into a Democratic administration, climate, uh, climate concerns and environmental concerns are going to be more important, not less. So whether we like it or not, those things are headed our way and we can either try and make them opportunity or, and maybe on the grain side, we can work to work on something to get additional payments associated with climate mitigation in whatever form that is. But those things are coming and as we all know, so get ready for him, I guess, and, uh, be prepared for the arguments. In particular on the livestock side, um, the arguments that, that they're, that meats are, are somehow, um, um, environmentally unfriendly and, and have to be countered some way. So be prepared to do that.
Shay
Foulk: I think diversification within the, the crop and livestock operations that are out there will definitely be beneficial moving forward if they want to continue to have a play in the livestock industry. And I think what you said there was key of it's coming whether we like it or not. And there are going to be a lot of opportunities for folks to take advantage of, for farm operations to take advantage of, particularly on the grain side. Just make sure our voices are heard, that we're talking to the right people and helping to shape this any way we can as we move forward. Any last thoughts here as we wrap up, as we review on 2020 outlook into 2021?
Dr.
Gary
Schnitkey: Well, I would say take advantage of the opportunities and enjoy these, uh, the particularly for grain farms, these good prices that we're having and enjoy them while they last.
Shay
Foulk: We'll bookmark it today. It's December 28th at 9 o'clock in the morning. We have $4.52 cash corn, $12.50 soybeans, uh, prices we haven't seen in, in a long time outside of a brief stretch in 2019. I think optimism is a key word moving into 2021, cautious optimism. A lot of challenges ahead, but farmers are known to adapt and overcome. So Gary, thank you so much for the time. I really appreciate it and look forward to having discussions with you down the road.
Dr.
Gary
Schnitkey: Thank you, Jake.
Shay
Foulk: It's been nice. Thank you everyone for listening to another episode of the Ag View Pitch, and we will catch you next time.