A Bloomberg headline caught my attention this morning: U.S. Growth Engine Looks Able to Power Past Stock Market’s Woes.
Reporter Christopher Condon noted that although stocks have taken a beating in recent weeks, economists are by and large unconcerned about what broader financial indicators say about prospects for continued growth in the U.S. economy.
To put this into perspective, Condon cited the worst-case outlook among the major players:
Goldman Sachs Group Inc. has one of the gloomier outlooks and forecasts that the recent decline in equity markets, as well as Federal Reserve interest-rate increases and a stronger greenback, will trim growth by about three-quarters of a percentage point by mid-2019, according to economist Daan Struyven. His outlook assumes stock prices remain steady.U.S. Growth Engine Looks Able to Power Past Stock Market’s Woes, Bloomberg, Oct. 22, 2018
I added a bit of emphasis in the middle of the paragraph to underscore the idea that “one of the gloomier outlooks” calls for a slowing of just three-quarters of a point. Well, okay then.
Earlier in the month, Chicago Federal Reserve president Charles Evans said the selloff in the S&P 500 seemed “modest.” Condon’s report carries similar sentiments from other economists, all more or less shrugging about the idea that the U.S. economy is anything other than robust, and should continue to be so for the foreseeable future.
But within individual sectors, things can be much different.
Keith Good at the University of Illinois compiled some relevant news on the ongoing Trade War and its effects on the farm sector in specific, and the conclusion is that the situation is more than just a blip on the radar for agriculture.
With regard to pork, Chinese tariffs on U.S. product run as high as 70% now, while Chinese demand for pork hasn’t slowed one whit. Given the incidences of African Swine Fever in China, the U.S. should be exporting pork at a rapid pace, but instead, Chinese customers are buying from companies in Europe and South America – and those firms are hoping to make these short-term buyers into long-term customers.
Likewise with regard to soybeans, China is the world’s largest buyer and the U.S. farmer’s largest overseas customer. Because of the trade war, U.S. exports to China are off 96%, according to a news release from Senator Heidi Heitkamp (D., N.D.).
Who is picking up those sales? Once again, it’s largely Brazil, with a little business going to Argentina and Canada, as well.
According to U.S. Census Bureau trade data, U.S. soybean exports to China (Sep-Aug) were the lowest in volume since 2013/14 and the lowest in value since 2009/10. USDA’s Economic Research Service noted that Brazil’s market share in China jumped from 48 percent to 66 percent during the same timeframe.
Although current farm financial indicators remain neutral to mostly positive, the question becomes how long farms can weather soft commodity prices. Corn prices continue to look for support, soybean prices have limited upside potential, and a much-expanded pork industry will continue to flirt with negative returns.
The Kansas City Federal Reserve put all of this into context in a recent update:
Non-real estate lending increased significantly in the third quarter, according to the National Survey of Terms of Lending to Farmers. The total volume of non-real estate farm loans was more than 30 percent higher than a year ago. This sharp growth in farm lending followed steady increases earlier in 2018 and represents the largest annual percentage increase in the third quarter since 2002.
The increase in non-real estate farm lending again was driven primarily by operating loans. Similar to 2015, when there was a significant increase in farm lending, loans to fund current operating expenses accounted for the majority of the increase in the third quarter.Large-Scale Financing Drives Ag Lending Activity Higher, Kansas City Federal Reserve, Oct. 19, 2018
So big picture, the bank concluded that, “alongside persistently low agricultural commodity prices, bankers throughout the country expected farm income to decline in the coming months.” Declining net farm income and increased need for short-term operating credit could be a warning bell.
On the other hand, the bank found that, “delinquency rates on farm loans remained low and the performance of agricultural banks remained sound.”
At least, that is, for now.