American farmers should diversify, says analyst

Grain farmers in the United States are in a financial pinch and may want to look north of the border for a way out, says an analyst.

Growers have been cutting costs during the last 2.5 years of the current downcycle. They have reduced equipment purchases, cut back on fertilizers and crop protection products and are negotiating lower land rents.

Now they are increasing operating lines of credit for the first time in years, said Owen Wagner, grains and oilseeds analyst with RaboResearch Food & Agribusiness.

It is reminiscent of what happened during the last downturn in 2013 and 2014. Agricultural lines of credit in the U.S. surged to US$100 billion by 2016, from about $80 billion before the downturn.

Agricultural borrowing then went on a long downward slide due to an influx of government support in response to the trade war with China and the post-COVID surge in commodity prices.

It then fell to the low $70 billion range but is now starting to creep higher. RaboResearch believes farmers will add another $20 to $25 billion in lines of credit debt over the next several years.

“There is every reason to believe that process is (already) underway,” Wagner said during a recent RaboResearch webinar.

Agricultural non-real estate borrowing was up 12 percent during the first half of 2024 compared to the same period a year ago.

How will U.S. agriculture pull itself out of this financial quagmire?

During the 2013 and 2014 downturn, the lifeline for corn growers was strong growth in the ethanol industry. For soybean growers, it was China’s booming economy.

Flash forward 10 years and it’s hard to feel good about either of those two sources of demand.

China and the U.S. are likely headed for another trade war under president-elect Donald Trump’s administration, which likely entails retaliatory tariffs on U.S. soybean exports.

There is also a belief that China’s soybean imports have peaked and are heading downward due to its shrinking population and maturing diets.

“China does not offer the same growth story today that it did (10) years ago,” said Wagner.

Biofuels have been an incredible growth story for 20 years, but cracks started to appear when the U.S. Environmental Protection Agency came out with disappointing national biofuel mandates in 2022.

Now the U.S. has a Trump administration that in the past was inconsistent in its support for biofuels.

Wagner said one approach for the U.S. grain sector is to continue to “hammer away” at the longstanding commodity model of agriculture, which means producing as much as possible at the lowest possible cost.

The problem is that Brazil has become better at that than the U.S. With the rise of double-cropping and improved infrastructure, a farmer in Mato Grosso can now produce soybeans at a lower cost than a grower in Iowa.

“We all need to approach this mentality with a bit of caution, recognizing just how competent our Brazilian competitors have become,” Wagner said.

Growers in a state like North Carolina, on the periphery of the U.S. soybean area, can’t compete with Brazil when it comes to providing soybeans for livestock on their own farms. And the U.S. is going to get less competitive because Brazil has 70 million acres of low-intensity pasture that can realistically be converted to cropland.

“It’s time to start asking ourselves, what do we want to do next in order to ensure that the agriculture sector is healthy going forward,” said Wagner.

He thinks the answer may lie in Canada, where farmers have diversified what they grow beyond the commodity crops.

In the 1980s and early 1990s, U.S. grain farming was more diversified than it was in Canada. American farmers were growing peanuts, tobacco, oats and sorghum. In 1980, about half of U.S. acres were devoted to the top two crops and that number has grown to about 70 percent today.

Canada has gone in the other direction. The number of acres planted to the top two crops has fallen from about 70 percent in 1980 to 55 percent today. Many Canadian farmers have shifted to growing less heavily traded crops like pulses and canola.

A good case in point is soybeans. Canadian farmers plant that commodity crop, but 25 percent of it is grown for the niche human consumption market versus two percent in the U.S.

The cropping shift in Canada started in the mid-1990s. Since then, growth in net farm income in Canada has outpaced that of the U.S.

Wagner thinks it might be time for American growers to consider diversifying into crops suited for a low carbon intensity fuel feedstock, food grade soybeans, ESG cotton, “orphaned” crops like oats and other niche products.

He does not suggest that growers abandon commodity crops. Farmers in the I-states will always be competitive in growing corn and soybeans.

But those on the fringes of the U.S. corn belt might want to think of planting alternative crops like their counterparts in Canada did 30 years ago.

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Tags: canola, United States, soybeans, Canada, farmers, imports, pulses, demand, China, Biofuels, corn, Brazil