Even with 2019’s Challenges, is There Such a Thing as Too Much Production?

By Tim Alexander

Illinois soybean producers are in the midst of an uncertain season. USDA had earlier indicated U.S. farmers would plant five percent fewer soybeans this year compared to last, as ongoing trade disputes created anxiety about profitability. Then came delays and prevented plantings.

The short-term outlook generates some fear as well, with pressure on farm finances into the next decade likely. The Food and Agricultural Policy Research Institute (FAPRI) at the University of Missouri’s U.S. Baseline Outlook report from April shows projected prices for U.S. soybeans affected by trade disputes could remain below 2014-2017 average prices until foreign tariffs are removed. Lower prices, oversupply due to solid growing conditions worldwide, the spread of African swine fever and a relatively strong U.S. dollar also may deter growth in U.S. exports.


Which begs the question: have U.S. soybean farmers become too productive for current demand?

“We are definitely in a situation where global supplies are heavy relative to demand – that’s why prices have been relatively low for the last several years,” says Patrick Westhoff, FAPRI director. “Part of this has been due to better than average weather around the world. It’s been six years since we actually had a global world average yield below trend for grains and oilseeds. Part of it is the technology that everyone around the world has invested in. Just having a normal yield year – whatever that means – could tighten up those supplies we see today.”

Westhoff says some long-reliable “engines of world demand growth” have slowed down over the past few years, reducing demand for U.S. farm exports.

“Reliable drivers of exports have been normal world population expansion, China and biofuels. But right now, we see about the same per-person grain and oils use that we had in 1980, other than in China. We are waiting to see what the next engine of growth will be,” he says.

“Places like India could become a more important source of demand growth,” he continues. “But to be honest, patching together any number of smaller trade deals could not compare to what we have seen with demand growth in China during the past 35 years.” 

For that reason, FAPRI economists established their most recent baseline premises for long-term projections assuming the U.S.-China trade war would continue into the foreseeable future. Similar projections from University of Illinois economists are based upon a lingering trade war.

“Our farmers have historically been able to out-produce demand and it seems as if we are there again, particularly with soybeans,” says Gary Schnitkey, University of Illinois soybean industry chair in agricultural strategy. “There is always a struggle to keep demand growing to meet our ability to produce. China and the trade tariffs and African swine fever will continue to keep demand down. It looks like we might be in a period of lower prices for a while.”

Westhoff agrees. The U.S. farm debt-to-asset ratio increased from 11.3 percent in 2012 to 13.5 percent in 2018, he says. The projected debt-to-asset ratio will average 14.8 percent from 2020 to 2028. Farm income is expected to be lower in 2019 for soybean farmers, with prices staying below $9 bushel per acre if the U.S. or South America produces yields at or above trendline.

So, what is Schnitkey’s advice to farmers? Stay the course by ensuring risk management and cash management systems are efficient for today’s economy. Continue with normal crop rotations and scrutinize each budget expenditure through the current economic downturn.

“We have to watch those cash flows and maintain liquidity during these couple of years that are probably going to be rough, with poor incomes. But the markets will turn around,” he predicts.