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Steps for Managing COVID-19 Uncertainty

Farm Credit Services of America (FCSAmerica) and Frontier Farm Credit co-sponsored a webinar on COVID-19: Understanding the Impact on Ag. Below are highlights and the recorded webinar.

 
 

Among COVID-19’s many unknowns is the long-term economic impact to the global economy. But even in this fluid period of transmission and community containment, it’s clear that U.S. agriculture will feel the financial fallout.

“An economic slowdown is all but inevitable . . . Agriculture will not be immune to this and we’re all going to have to deal with the changes and adjustments to commodity prices,” says Tim Koch, our chief credit officer and host of our first webinar examining the impact of COVID-19.

In the span of a couple weeks, grain prices fell 15% and soybeans were down 10%. Protein sectors have experienced price shocks not seen in decades. While it is easy to be overwhelmed by the bad news, Koch said, this is not a time to panic. Agriculture understands uncertainty and volatility. Until there is greater clarity about COVID-19’s impact, Koch said, consider the following steps: 

  • Avoid big decisions if possible. “We think that during this timeframe, status quo may be the best course of action.”
  • Preserve cash. “Look for opportunities to preserve or maximize cash positions. . . For some of us, that will mean delaying major expenditures.”
  • Be opportunistic. Do today’s low oil prices offer an opportunity to lock in savings on fuel and fertilizer? Have you talked to your financial officer to determine how best to use today’s interest rates in your operation?
  • Communicate with business partners. “Communication through any time of uncertainty is paramount . . . If you’re adjusting your marketing approach to your grain, will that result in an increase to your credit needs? How do you communicate to your lender about what your cash flow is going to look like?”

Sector-Specific Challenges

Jud Jesske, a veteran ag lender who specializes in the beef industry, noted that 2020 began with strong demand for beef and a positive outlook. All that changed with the announcement of the first COVID-19 case in the U.S. The protein sector, and particularly the beef industry, is suffering some of the worst short-term impact of COVID-19. The ethanol industry also is expected to be a short-term loser.

Jesske said the challenges facing the beef industry are many, including keeping the supply chain moving, pricing opportunities and long-term demand destruction. Bright spots have emerged. As China starts to recover from COVID-19, there is hope the country will fulfill its trade agreement to buy U.S. ag products. Market movement has been more positive in recent days and domestic demand for beef remains strong.

In this environment, Jesske said, it’s important for cattle operators to know their cost of production and “remain nimble.” Talk to trusted advisors about your options and be ready to take advantage of opportunities, he advised.

Elaine Kub, a market economist and columnist for DTN, said it can be difficult to understand why agricultural products have been impacted by the fall in commodity prices. After all, people and animals have to eat. In fact, ag commodities generally have been more resilient than many others. Ethanol, however, is more vulnerable in a market where crude oil prices are trading as low as $19.46 per barrel.

“Ethanol goes along for that ride. Ethanol future prices are 88 cents per gallon,” Kub said. “If you look at the expectations for the next several months, the expectation is that it will remain that cheap for an extended period of time. It’s not until the December 2020 contract that ethanol prices are expected to be back above $1 per gallon.”

Potential Disrupters

It’s not just market risks that producers have to manage, Kub said. COVID-19 brings with it the potential to disrupt supply chains. That requires producers to be proactive so they can get their crop in the ground.

Trucking, for example, might encounter a driver shortage due to health concerns or the hassle of traveling when so many businesses, such as restaurants, are shuttered. There is a potential for fuel disruption, including to fertilizer. Labor is another area to consider. Many of Kub’s South Dakota neighbors rely on farm laborers from South Africa. At this point in the COVID-19 outbreak, she said, there are no flights to get people from Cape Town, South Africa, to Aberdeen, South Dakota.

Kub says there is no reason to be alarmed, but it would be wise to take stock of your planting needs and contact the businesses you depend on to determine if your seed, fertilizer and other inputs are where you need them.

“If you are brainstorming ways to make your operation more resilient, have things in place locally, have labor available locally, have a plan B set up,” she advised.

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FCSAmerica serves farmers, ranchers, agribusinesses and rural residents in Iowa, Nebraska, South Dakota and Wyoming. For inquiries outside this geography, use the Farm Credit Association Locator  to contact your local office.