Evening Report | September 8, 2023
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Your Pro Farmer newsletter is now available... Analysts expect USDA to cut its corn and soybean crop estimates in the Sept. 12 Crop Production Report following hot, dry conditions in late August/early September. The September crop estimates will include USDA’s first objective yield (field) samples for corn and soybeans. NASS will also adjust acreage if needed. The year-to-year change in crop condition ratings at the beginning of September, our Crop Condition Index ratings and Crop Tour data suggest USDA will reduce yields to about 174.0 bu. per acre for corn and 50.0 bu. for soybeans this month, though we expect final yields to decline even more. El Niño conditions are causing issues in other areas of the world, including Asia and Australia, where crops have been impacted by volatile weather. Meanwhile, the U.S. posted another record ag trade deficit in July and USDA’s projections call for a deepening deficit through fiscal year 2024. Trade policy and impacts to exports in particular are a concern for agriculture. We take a look at key trade policies and happenings in this week’s News page 4 feature. We cover all of these items and much more in this week’s newsletter, which you can access here.
Ukraine: Don’t ease Russian sanctions for revival of grain deal... Ukraine opposes the idea of easing sanctions on Russia in order to revive the Black Sea grain deal, foreign ministry spokesperson Oleg Nikolenko said. “Easing part of the sanctions regime against Russia in exchange for the resumption of the grain agreement would be a victory for Russian food blackmail and an invitation to Moscow for new waves of blackmail,” he said.
Farm debt increases amid strong loan performance and margin challenges... Farm debt continued to rise, particularly non-real estate loans, with outstanding agricultural loan balances at commercial banks increasing by about 5%, according to an ag finance update from the Kansas City Fed. While farm debt increased, loan performance remained strong, with delinquency rates edging lower for the third consecutive year. Agricultural banks reported higher net interest margins and returns on assets compared to the previous year but faced some softening in the last quarter due to rising funding costs.
The outlook for agricultural credit conditions remained robust, despite a recent moderation in the farm economy, the report says. While there may be some challenges, such as a slight pullback in key farm product prices and elevated expenses, farm finances remained strong overall. Rising production costs and the use of cash reserves to reduce loan levels in recent years could increase credit needs for some producers, the authors noted. Although more lenders anticipate a softening in farm income and repayment rates soon, agricultural credit conditions are expected to remain strong through 2023.
In the second quarter, faster growth in non-real estate lending contributed to steady increases in farm debt. Outstanding farm production and real estate loans at all commercial banks increased by 7% and 5% from a year ago, respectively, with agricultural banks experiencing even stronger growth. Farm debt increased from a year ago at slightly more than half of all banks, marking the largest share since 2016.
Despite the growth in farm loan balances, loan performance continued to improve. Delinquency rates reached their lowest level since 2010 for both real estate and non-real estate loans. Strong growth in loan interest over the past year helped offset higher deposit expenses and support net interest margins. However, interest margins flattened slightly in the last quarter due to a considerable rise in funding costs.
Bottom line: While there are margin challenges and potential softening in the farm economy, the agricultural credit outlook remains positive for the foreseeable future.
Corn grower leaders urge adoption of GREET model for emissions assessment... A group of 17 prominent leaders in the corn growing industry, including the president of the National Corn Growers Association (NCGA) and leaders from various state grower groups, have sent a letter to Treasury Secretary Janet Yellen advocating for the adoption of the GREET model for assessing greenhouse gas emissions. This model, developed by the Department of Energy (DOE), is considered the federal government’s most comprehensive and up-to-date methodology for evaluating transportation lifecycle greenhouse gas emissions. It is employed globally to measure emissions in transportation.
The letter emphasized the GREET model offers a more holistic view of environmental factors compared to other models. It accounts for on-farm carbon reduction practices, increased feedstock yields and advancements in agricultural production methods over the past two decades. As a result, the corn growers assert that GREET is the most suitable methodology for determining tax credits for sustainable aviation fuel (SAF) under the Inflation Reduction Act (IRA).
Corn ethanol, which has proven effective in reducing greenhouse gas emissions from automobiles, is now being considered for use in aviation to achieve similar emissions reductions. The tax credit provided by the IRA is seen as crucial in expediting the adoption of ethanol in the aviation sector. The choice of emissions model for assessing greenhouse gas reductions will likely influence the decision on tax credits.
The letter cited President Biden’s recent statement that farmers will lead the way in aviation biofuels and emphasized the need for a reliable emissions assessment model to fulfill this promise. While Yellen was initially expected to make a final announcement on the tax credits in the coming month, Reuters earlier this week reported the Biden administration likely will delay until December a decision on whether to make it easier for SAF made from corn-based ethanol to qualify for subsidies under the climate law.
Induced losses in HPAI outbreak 2023 highlight gaps in federal indemnity scheme... As the one-year anniversary of the highly pathogenic avian influenza (HPAI) outbreak in 2023 passed, the U.S. agricultural industry seemed relatively unaffected, notes an article by Southern Ag Today. However, the outbreak, triggered by wild fowl migration, left its mark, with scattered detections in commercial broilers, turkeys and gamebird operations in the early part of the year. By May 2023, commercial flock detections had ceased, indicating the end of the outbreak for the commercial poultry sector.
The Animal and Plant Health Inspection Service’s (APHIS) HPAI Response Plan, also known as “The Red Book,” along with other USDA policies and guidance documents, played a crucial role in coordinating and structuring the response to the outbreak. However, this outbreak exposed limitations in the current indemnification and compensation process:
Contract Growers: Growers without ownership of the affected birds or eggs are not eligible for compensation, despite suffering complete revenue losses until production can resume after quarantine restrictions are lifted.
Ancillary Business Operations: Businesses such as breeders supplying chicks and poults are not eligible for compensation, even though they experience revenue losses due to the cessation of production at infected or quarantined premises. This limitation arises from quarantine restrictions that affect poultry operations within the entire control zone around an infected premise, causing “induced impact” on revenue.
One state, Pennsylvania, heavily affected by the HPAI outbreak, took action by appropriating $25 million for the "Highly Pathogenic Avian Influenza Recovery Reimbursement Grant" program. Administered by the Pennsylvania Department of Agriculture, this program provides reimbursement to those directly impacted by HPAI, covering financial losses incurred due to inclusion in a control or quarantine zone.
Additionally, a federal bill called the Healthy Poultry Assistance and Indemnification Act of 2023, introduced as S 2235 by Sen. Chris Coons (D-Del.), aims to address this gap on a nationwide scale. The bill is currently under consideration in the Senate Ag Committee.
Bottom line: The effectiveness of state-level actions and the potential for a federal solution remain to be seen as the situation unfolds.
