Coronavirus

How COVID-19 Has Shifted the Financial Outlook for U.S. Agriculture

A farmer holds a handful of beautiful red tomatoes
Credit: valentinrussanov for Getty Images

By Brian Philpot, CEO of AgAmerica

COVID-19 Challenges for U.S. Agriculture

Global trade wars and farm labor shortages were topics of concern in the agriculture sector prior to COVID-19, but the pandemic has amplified the severity of these challenges while creating new ones⁠—such as logistical bottlenecks⁠—and has placed increasing pressure on American farmers and ranchers to keep our domestic food supply secure.

During the second quarter of 2020, at the peak of the pandemic, the fragility of the food supply chain disrupted the agricultural sector. Restaurants, schools, and processing plants went into lockdown. Agriculture commodity future prices experienced extreme fluctuation in response to the uncertainty surrounding the pandemic.

Percent change in prices in 2020; most have not yet fully recovered

Logistical issues arose for export trade as borders tightened restrictions and paralyzed the distribution process. The optimism created by the Phase One agreement between the U.S. and China was saturated with doubt and ag economists scaled back their initial agricultural export predictions.

U.S. cumulative ag exports to China -- 2020 increase does not match heights from 2011-2015

Less than 20 percent of the obligated $36 billion worth of U.S. agricultural purchases were made in the first half of 2020. China has since accelerated import purchases, but still has a long way to go to meet its initial goal. Beyond supply chain and global trade bottlenecks, border closures have also clogged the labor pipeline for many American farmers during critical planting and harvesting seasons.

Labor share of total operational expenses -- typically at around 5-15%, but almost 40% for specialty crops

Specialty crop farmers rely the heaviest on hired farm labor, accounting for 37 percent of their total operational expenses. The logistical bottlenecks delayed the arrival of farm labor and forced many farmers to plow under crops or leave produce unpicked in fields, further impacting their potential income for the year.

Impact of Fiscal Response on Farm Income and Bankruptcies in 2020

Because of these unforeseen circumstances, farm income will rely heavily on federal subsidies this year to offset the losses incurred from COVID-19. Government payments have led to a steady increase in U.S. net farm income each year since its lowest point in 2016.

U.S. net farm income much lower during Trump administration vs. Obama administration

The initial forecast back in February for net farm income was $96.7 billion. However, due to an estimated $37.2 billion in federal funding, the most recent USDA estimate for 2020 net farm income has risen to $102.7 billion—a 23 percent increase from 2019.

U.S. Farm sector - direct government payments chart showing a big rise in the last 4 years

The substantial fiscal response of the government will make up an estimated 36 percent of net farm income in 2020. This will be the highest share in nearly two decades and is also impacting the rate of Chapter 12 farm bankruptcy filings for the year.

Chapter 12 farm bankruptcy filings chart showing a rise over the last 4 years

According to an analysis conducted by AgAmerica’s Chief Economist, Dr. John Penson, farm bankruptcy filings have slowed since the start of 2020 despite an eight percent increase since June 2019. Even so, the current farm bankruptcy rate of 2.56 percent remains below the 2010 high of 3.76 percent. Federal assistance programs in light of COVID-19 challenges have been the main contributing factor in preventing an influx in farm bankruptcies and will continue to play a role in maintaining farm income in the coming years.

The Future of U.S. Agriculture and Financial Strategies for 2021

Using the challenges of COVID-19 as learning lessons, American farmers and ranchers are working towards building resilience in the years to come. Direct-to-consumer models are on the rise as is the development of agri-technology that can potentially reduce the amount of farm labor needed to keep our domestic food supply chain strong.

While federal support eased the losses experienced in 2020, not all farmers were given equal access, leading to the development of alternative strategies to stay financially secure in market volatility. The low interest rate climate has made it an opportune time to restructure debt and, in turn, increase access to more flexible cash flow. Proactively evaluating balance sheets and understanding the financing options available are both crucial for U.S. farmers and ranchers as we navigate these unparalleled times.

One certainty remains, agriculture is an industry of necessity. Despite the unsure economic climate, the fact that people need to eat will never change. At the end of the day, American farmers and ranchers provide an essential service. The industry may evolve and adapt, but the necessity of agriculture will remain constant.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.