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2020 Decision Making for Ag Producers

Educational Opportunities: 
Grain, Dairy, Swine, Beef, Women in Ag
Home > Education & Events > January 2020 > 2020 Decision Making for Ag Producers

2019 was a farming adventure. Weather, politics, insurance program rules, USDA reporting and the Federal Reserve all factored in to on-farm decisions. Producers didn’t have much time to digest all this information to make the best decisions possible, and this increased stress levels. I know many farmers would agree that the best part about 2019 is that it’s finally over.

The new-year has many important decisions coming up. Producers have some time right now to gather information to make the best decisions possible for 2020.

One lesson learned from the weather in 2019 is, “Prepare for the worst, and pray for the best.” This includes visiting with your crop insurance agent and agronomist to determine the best strategy to complete any of last year’s unfinished harvesting, fieldwork, planting decisions, crop protection and yield reporting. Then make the best decision to protect your crop in 2020. Producers will find some surprising coverage options for 2020 with Supplement Coverage Options. If you are a dairy producer, make sure to have the latest quotes for Dairy Revenue Protection. Be sure to leave time to talk about this with your agent.

USDA will continue to surprise us with new information in 2020. Check out the important Crop Production Report and Grain Stocks Report which was released on January 10. In past years, this report has shown the potential to move the crop markets and may impact your grain marketing decisions. The March 31 USDA Grain Stocks and Prospective Plantings report can also have an impact to the markets. It may influence what you may want to consider for a crop mix in 2020.

The influence of politics on farming in 2020 in not likely to lessen in an election year. Phase 1 trade agreements with China and USMCA are both closer to reality, but the impacts aren’t quite clear. In the past few years, it seems the best strategy has been to execute solid risk management without trying to outguess the political process. Having a plan in place will reduce your amount of stress in a supercharged political year.

One of the most important decision on your farm could be your election of programs from the new farm bill. The ARC and PLC are back on the table, but this year the decision may be much different. Many people are finding PLC a winner, especially with the ability to add SCO as mentioned above. Each farm in each area is going to be different, so you can’t guess on this one. You will need to evaluate this choice closely.

Much gets written about the impact to farming from low commodity prices, but one factor working in farmers’ favor has been interest rates. Farming is a capital intensive business that often requires the use of debt financing. Among the many issues that contributed to the farm crisis of the 1980s was the absolute high level of interest rates. The U.S. 30-year Treasury surpassed yields of 14% many times, peaking at 15.25% in 1981. Yet, since that time, the U.S. has seen a continuous secular decline in rates. This summer saw 30-year Treasury rates at the lowest level they have ever been, briefly crossing below 2%. That’s quite a run.

Short-term rates trend in a similar way, but are a touch more volatile. They derive from the Federal Funds Rate set by The Fed. Following almost a decade of 0% interest rate policy, the Fed prepped the world to expect higher short-term rates, only to reverse course in 2019.

Playing a bit of the role of both Jekyll and Hyde, the Federal Funds Rate rose from zero to 2.25% between 2016 and the end of 2018. Few would have guess that December 2018 would be the high water mark for rates, but starting in August, the Fed dropped rates three times in three months. Yet, the current message is no more rate cuts without a significant deterioration. It’s what is being called “an economy engaging all cylinders.” In fact, the market’s probability of the Fed rate cutting rates at all in 2020 is merely a coin-flip.

The question is, where do we go from here? As a friend of mine often says, it’s hard to fall off the floor. We aren’t exactly on the proverbial floor today, but we are close enough – even if the “floor” isn’t zero anymore. Negative interest rates are a new worldwide instrument. A few countries have experimented with government rates below zero. It’s a tough concept to grasp (even for me). Without getting into the details, the most important takeaway from the global experiment is that – it isn’t working.

Negative rates wreak havoc on the system that lends money. As such, lower rates going forward, particularly U.S. long-term rates, would only come hand-in-hand with less institutions supply financing to those that need it. In an environment where making prudent risk management decisions is of utmost importance, betting on rates going lower doesn’t appear to remain in one’s favor.

This article was originally published in Agri-View, and was jointly written by Bill Moore, Chief Risk Officer, and Glenn Wachtler, Financial Officer for Compeer Financial. 
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