Ag forecast: More 'churn' ahead
OLIVIA, Minn. — The profits in farming will belong to the best managers, while the least efficient will continue to struggle in the coming year.
Michael Swanson, senior vice president and agricultural economist for Wells Fargo and Co., told shippers along the Twin Cities & Western Railroad that he expects to see continued “churn” between the top and bottom producers in 2020.
“Some people are going to lose a lot of money in 2020 growing corn. And a lot of people are going to make decent money growing corn in 2020,” he said at a luncheon sponsored by the railroad last week.
He showed his audience a Wells Fargo chart tracking crop producers. It shows a continued and growing gap in the economic performance between the most efficient and the least. Those on the bottom quarter of the chart have seen their return on assets hover at zero or below in the last three years, he said. The average return on assets has been around 4 percent to the positive, while some of the most efficient have seen as much as a 12 percent return on assets.
“The ability to be good and bad in this business is huge, and it makes a big, big impact on who is going to change,” said Swanson.
“It’s the churn,” he said. “Top producers want to get bigger. The bottom producers wonder how they are going to stay in business.”
He expects the same scenario ahead for livestock producers as for crop producers, although he noted that livestock markets are much more volatile.
Overall, he doesn’t expect any major changes in commodity prices. It’s a global market, and our prices are very much tied to those in Brazil and others producing for export. He noted that world oilseed and grain supplies per person have been continuing to grow for decades.
The bright spot for agriculture is a growing world hunger for meat. Today, the U.S. is exporting 25 percent of its pork overseas and 20 percent of its chicken. He expects continued growth in world demand for the two types of meat.
Demand for beef has remained relatively flat, he said.
Pork and chicken producers are likely to continue to increase the supplies of both meats.
“They are very competitive (industries) and we are very good at doing them,” he said.
The increased production will go largely for export. U.S. population growth is too modest to keep up with the supply. The growth in supply is five times that of the demand created by population growth, he said.
He sees continued challenges for the ethanol industry, hit now by a world oil glut as Saudi Arabia ramps up production and lowers prices. There has been a flattening out of domestic utilization of ethanol, and he doesn’t expect any increases ahead.
Vehicle fuel efficiency continues to improve, and at any point, a big leap in battery technology for electric vehicles could prove to be a game changer, he said. Every Tesla that goes on the road chips away at the demand for ethanol and ultimately, corn.
“It directly attacks 40 percent of U.S. corn demand,” he said.
To show the financial challenge today for ethanol, he pointed out that in December 2016 it took 1.94 gallons of ethanol to buy a bushel of corn. Today, it takes 3.1 gallons of ethanol to buy a bushel of corn. That bushel will yield 2.8 gallons of ethanol.