Economic impact of COVID-19 on farmers
The impacts of COVID-19 on agricultural assets and lending markets were the topic of a webinar held by the University of Illinois as part of their Coronavirus and Ag series.
Jackson Takach, chief economist and head of strategy, research and analytics for the Federal Agricultural Mortgage Corporation (Farmer Mac) said because they are not a local lender they have been assessing the effect of the pandemic and how it has been emerging in the ag rural states throughout the U.S.
“Not that they are coming down with COVID-19, but, it’s more of the economic knock-on effect,” he said. “What are the derivatives affecting the general economy? And how are those falling back on the farms and what does that mean for lenders?”
Takach said most ag states are lagging in terms of case development of COVID-19, which he said is great news.
“The great impact to farmers, ranchers and rural residents has been far muted,” he said. “There’s been less hospitalizations, less usage of ICUs, less cases in general. The direct health impacts are better than in urban areas. But, I think we have to be careful about being excited about that. It may take longer for the direct impact for rural communities.”
What does that mean for agriculture and how is that flowing back to farm income statements and balance sheets?
“I call these knock-on effects of derivatives of COVID-19. Each one of these is really impacting commodity prices and income. It’s all about demand and what is happening to the demand of agriculture goods and services,” he said.
Takach said not having gasoline demand, at this time, has directly impacted the ethanol producers and that has indirectly impacted the price that buyers are willing to pay for corn.
“We have heard a lot about gasoline. When consumers don’t drive, they stay at home and demand for gasoline goes down. Demand for ethanol goes down, then ethanol plants have actually been closing as a result of that decline and demand,” he said. “That is going to be something that lasts not just for the next couple of weeks — even when we start getting back to normal. This is a demand function that is going to continue.”
The anticipated soybean sales to China have also been affected by the COVID-19 pandemic.
“China is doing their best,” he said. “But they are still coming back from their outbreak earlier this year. Trying to see those massive numbers that China agreed to purchase in ag goods in 2020 — just don’t know how feasible it will be to get all that $40 billion from China by the end of the year. Their hog markets aren’t back. Their consumer demand is not back and that is causing a slowdown in our expectations for exports.”
Overall, there is lower global growth.
“It’s not just U.S. and China and the EU that are experiencing disruptions because of COVID-19, it is all across the globe. South America is starting to see their numbers build. You have all parts of Asia, Europe, Africa all seeing increases, and that’s going to put a lot of pressure on global GDP and global economic activity,” he said. “Our goods and services in agriculture rely on global growth to drive export demand. A lower global growth scenario means potential for less exports.”
Along with the lower gasoline demand, Takach said the food demand from the closing of restaurants and schools is also starting to struggle.
“This is something that has taken time to really show. Restaurants and schools buy in bulk. They buy 10 pounds in cheese at a time, not 8 ounces of cheese at a time. So, while grocers are seeing incredible increases in demand, numbers they have never seen before, a lot of the producers feeding restaurants and schools don’t know what to do with their 10 and 20 pound bags of inputs for different food productions. You have read a lot of stories lately of dumping of milk. This is why,” he said. “Because there is just no scale that you can immediately take those large bags of cheese and other milk products to retail directly. So, that will take some time to work out. You also see it in the fresh fruits and vegetables. All the lettuce that gets created and sold to restaurants and school systems, there really is not a way for them to produce them and package them for grocery this quickly. This will take some time, it will retool the supply chain to make it work at a grocer level.”
In terms of considering direct effect, Takach recalled in early March cattle and hog prices plummeted.
“The livestock sector took a big hit,” he said. “Particularly for those of you raising hogs and cattle. It started out as a fear the restaurants are not going to be buying steaks, they’re not going to buy the same cuts of meat, not the same quality of meat.”
Takach said hogs, for example were above last year as far as numbers being brought to the slaughterhouse on a daily basis, but that has changed.
“Last week we started to see some separation falling off the prior year and it really has to do with some plants shutting down. That is what I mean from direct effects. The packers and slaughterhouses are seeing workers calling in sick. They have COVID-19, or suspect they have COVID-19 or some workers fear they are being exposed to it. This is really the first evidence I have seen of the direct impact of the food supply chain and it is starting with the protein sector and this would put increased pressure on cattle prices and hog prices.”