January 19, 2021

9 Questions Facing Agriculture In 2021

By David Widmar

by Brent Gloy and David Widmar

 

Each year we carve out time to think about the issues and uncertainties facing agriculture in the coming year. This week, we outline nine questions facing agriculture in 2021.

1) Another Strong Farm Income Year?

The combination of record-high government farm payments and a Fall/Winter commodity price rally lifted farm incomes in 2020. In 2021, we will be watching direct government payments, commodity prices, and expenses. Government payments are likely to tumble from 2020 records but remain historically high. Commodity prices are starting the year off on a good note, but keep an eye on expenses, which are likely to rise as well.

2) Red Hot Farmland Market?

The robust farm income recovery has sent ripples throughout the farm economy. In recent months, anecdotal observations of farmland values and cash rental rates suggest “bidding up” activity is already underway. In 2021, two ideas on our minds are 1) how have farmland values and rents changed this winter and 2) what does the market have in store for next fall/winter?

3) Trade and Usage

While it took until late summer to materialize, China has returned as a major buyer of U.S. agriculture goods. While certainly good news, the question on everyone’s mind for 2021 is “what’s next?” Phase 1 was signed as a stepping stone towards a more comprehensive agreement. Of course, COVID-19 pushed trade negotiations to the backburner, and now there is a new administration.

Beyond China, the new administration could pursue work on a modified/enhanced TPP agreement, which many argue could be an effective tool in negotiating with China.

Beyond trade, concerns remain about usage, especially from ethanol. In addition to economic activity and high corn prices, the industry will spend the early months of 2021 watching (and hoping) the courts and new administration enforce the RFS regulations.

4) COVID-19 & Recovery

For at least the first six months of 2021 COVID-19 cases and the progress will be front-of-mind. Will cases surge such that more social distancing efforts are necessary? Will the vaccinations provide coverage, leading to fewer cases and more economic and social activity in time for summer?

5) U.S. Economy & Stimulus

At present, the disease, vaccination, economy, and stimulus efforts are in a tight feedback loop. For example, a strong vaccination rollout could curb the disease, leading to an improved economic outlook and reduce the need for additional stimulus efforts. Conversely, limited vaccination success and upticks in the disease could further slow the economy and warrant even more stimulus efforts.

What’s unique about the current economic situation is the link to the disease. As social distancing efforts went into effect, it was clear to everyone the economy was stalling long before traditional measures of economic activity captured the effects. Looking ahead, the progression of the disease will also be telling in how the economy starts to recover.

Later in 2021, the longer-term effects will start to be evident. What consumer patterns have shifted more permanently? What businesses will close for good? How many companies will continue to work remotely?

6) Acreage, Production, Ending Stocks

In recent years, the acreage conversation has been a bit like forecasting a game of musical chairs and wondering which crop will get stuck with the acres. For example, winter wheat dropped 10 million acres since 2014 and corn threatened to touch 97 million acres last year. For 2021, the tone is a bit different. Now the debate has more of a “who can get the most acres” flavor. Case in point, winter wheat acres are – at least for now – expected to be up 1.5 million acres.

Prevented planting has been the other big factor that limited U.S. production in 2019 and 2020. Heading into 2021, all eyes will be on Spring planting conditions and the tight ending stock situations. While the market will likely incentivize producers to plant, Mother Nature bats last and is not swayed by the markets. If U.S. (or global) production appears to falter, markets will likely send prices significantly higher to ration demand.

7) Weather

At present La Nina conditions prevail, but will they hang around into the summer growing seasons? It’s no secret that dry and drought conditions persist throughout much of the Great Plains, and even into the traditional Corn Belt. How will this translate into 2021 production? It’s (probably) way too early to tell. At most, one could argue widespread dry conditions during the winter are perhaps necessary but not sufficient conditions for widespread issues during the growing seasons. In other words, it is hard to have a big summer drought with wet winter conditions, but dry winter conditions alone are not enough to trigger summer growing season woes.

8) D.C. Priorities

With a new administration in the White House and the Senate majority coming down to the Vice President breaking any ties, how will the new landscape alter the priorities in D.C. in 2021? Make no mistake, most of the political discussions in 2021 will likely be dominated by the economy and COVID-19.

We are also carrying some issues over from 2020. Among the things we are watching is to see if there is movement in 1) the FDA issuing guidance on labeling dairy alternatives, 2) livestock markets and cash market settlements, 3) dicamba approval and court scrutiny, and 4) rules and regulations implementation around the Renewable Fuels Standard.

9) Global Issues

A year like 2020 seemed to turn the dial down on global tensions, especially in the hotspots of Iran and North Korea. As the world potentially emerges from COVID and economic contractions, will global tensions rebuild? Elsewhere, ag-related strikes in Argentina have the market’s attention and the U.K. is (still) working on breaking things off with the E.U.

 Wrapping it Up

Writing and posting these lists is often an exercise in humility. Last year, for example, we wondered if a disease could influence global ag markets (African Swine Fever), pondered if the U.S. economy would add another year to the long-lived expansion, and how drama in D.C. (impeachment and EPA/RFS) would sort out. Yeah, those were issues, but they were dwarfed by the issues that actually emerged in 2020.

With the future so unknowable, then why do we do these? We believe the exercise – however humbling – is helpful in improving one’s decision-making processes and thinking through the potential effects of our decisions.

First, the process focuses one’s thoughts and improves the filtering and sorting of noise generated by the “breaking news” cycle. By priming our thoughts and expectations, we are less reactionary and prone to playing defense. Second, reviewing these lists – critically – allows one to evaluate and review the shortcoming and gaps in our thinking. Reviewing often highlights the importance and necessity of resilience in our thinking, planning, and risk management efforts. In other words, create space for those unknown-unknows.

If we learned anything from 2020, it is that nobody knows what the future – let alone 2021 – will have in store. Uncertainty makes planning and decision-making more challenging, and the temptation during periods of great uncertainty is to throw our hands in the air. However, uncertainty does not give us a pass or allow decision-makers to shirk responsibilities. Instead, periods of uncertainty amplify the importance of discipline and sound decision-making processes.

We challenge you to makes your own list of questions facing you and your business in 2021. Write it down. Then, set a calendar reminder for January 2022 to revisit that list. Second, while making that list, consider the investment you will make in your decision-making for 2021. What source of information can be improved? What decision tools or mental models can you add (or improve upon) to your toolbox?

Next week we will take this idea further and turn these mostly vague uncertainties into something more tangible.

 

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