Time to double down on your farm operation, says FBN chief economist
Looking ahead at agriculture, Kevin McNew is optimistic. McNew is the chief economist for Farmers Business Network. Prior to joining the company four years ago, McNew spent 10 years as an economics professor at the University of Maryland and had his own business involved in commodity trading. He grew up on a farm in Oklahoma.
“For the last 30 years, I’ve been trying to unravel and unlock the mysteries of agricultural markets and the comings and goings of agriculture to help farmers make better decisions,” he says.
SF: What were you doing when Tom Vilsack was secretary of agriculture under President Obama?
KM: In those days we were thinking about renewable fuels and biofuel, quote unquote, as the answer around climate change. Vilsack, being from Iowa, was very much on board with that message. That was as deep as USDA got in the whole climate, agriculture interface.
Now, we find ourselves in a different situation. It’s taken on a renewed emphasis. Vilsack is going to have to step up that climate, agriculture interface. Under the Biden administration, it looks like it’s going to be more around sustainable ag practices, and probably less around what we in agriculture have thought about with biofuels.
In the late 2000s, early 2010 period, agricultural commodity markets were doing some exciting things. We had China on the scene in terms of becoming a major soybean importer. We didn’t worry too much about some of these climate issues that we’re now talking about today, or as much emphasis as they will have going forward.
SF: Climate is a top priority for many of the new people at USDA. That’s a shift from the trade emphasis and direct assistance for coronavirus from the last administration. Economically, what do you expect to change for farmers under Vilsack, and how should they prepare?
KN: Whether you like the new administration or like the old administration, things are going to be different as it relates to agriculture and trade. Those of us in agriculture know that trade is so important to our economic livelihood. The last four years, we saw the U.S. really taking an offensive approach to trade and trade relations.
Now, I think we’re going to see more normalized trade relations. When we do have trade flare-ups, it won’t be one-on-one and the tariff mechanism used to distort markets. I think we’re going to see more multilateral trade negotiations. For agriculture, I think that’s pretty good. We want to have that open access to markets. Obviously right now, with what we’re seeing with China is just massive in terms of the volume of exports that they’re buying from the U.S. and the rest of the world. We want to see that continue. That’s going to be paramount and important for growth in U.S. agriculture going forward. I think that’s the runway we have in front of us in terms of agriculture, which is very promising, compared with going through a trade war, and the effects of COVID that we’re hopefully getting behind us.
SF: In recent weeks, commodity prices are up. How should farmers take into account the policy and priorities shifting at USDA while watching the markets?
KN: Obviously, it has been a tough road over the last five or six years. We’re looking at that at FBN and saying, we’re probably going to see things like land values really start to escalate, rental rates start to escalate, things we haven’t seen in the last five years.
I think farmers who are watching their bottom line and looking forward need to start making proactive decisions. These are times to double down on technology. These are times to double down on getting your scale right, whether that’s increasing your scale or getting your efficiencies right.
I think for the next couple of years, we’ll probably see these really good returns to farming and really good returns in crop production. It won’t persist forever, it never does. We all know that will ebb and flow, but I think right now is really time to double down on your operation.
SF: The January 2020 Successful Farming cover story featured some of the niche ways farmers can be paid to participate in some of the environmental practices. USDA is interested in this, too. What does that mean for farmers?
KN: While we’re focusing a lot of attention on USDA and this new paradigm shift, really, in some sense, it’s going on at a groundswell in the market already. There are already existing plays being made in the marketplace around carbon sequestration and agricultural practices. At FBN, we’re going to be launching our own carbon initiative program tied to farm production practices in late February.
It’s already getting a market-based solution. I’m excited to see what USDA will bring to the table. They obviously have a deep wallet to incentivize farm practices. It will be interesting to see how a government system dovetails into market-based solutions that are already evolving as we speak today.
SF: As FBN enters that market-based landscape and the government explores its role with policy or programs, how do those ideas work, or not work, together?
KM: That’s the key thing. It’s kind of the Wild West right now. It’s an open frontier and everyone is trying to figure out, how do you get this to work? We don’t have a really good roadmap for how you take climate practices, or practices that maybe a consumer wants and pass that economic signal down to a farming practice. We’re still trying to sort that out, and that’s a very complex issue to do.
I think it is going to be crucial for USDA to really look thoughtfully at this problem. I think they’ve done that by saying they want to get comments from farmers and market participants already engaged. I think it’s yet to be defined – how it will look and how it’s going to work. But I am excited because there are already market participants doing this and now, hopefully, the government will come in with some thought leadership around how they accentuate what is already trying to happen as a market-based solution.
SF: As FBN looks to be a player in that market, how are you making sure that could work well with a government program?
KM: I think right now we’re kind of testing the market trying to figure out what consumer goods companies want. What are they looking for in terms of identification that they can pass on to their consumers? How do we work with them to, in turn, get the farmers to enhance their practices, or change their practices to meet those needs? Then, how do we keep that commodity tied to that practice through the food chain? It’s a very complex thing.
What we’re doing right now is what I’d call ground truthing some of this. We’re working with CPG companies really about initial thoughts and practices, and how we transmit not only the product, but also the data associated with that product up through the food chain.
Now, we’re getting to a point where we’re ready to start talking about valuations of practices that are carbon sensitive. How do we set practice pricing for certain carbon-sensitive practices? It’s just a big sandbox of experimentation at this point – what we’re doing, and I’m sure other companies are doing, too. I’m excited to see where this goes.
SF: Our readers likely fall into three categories – the early adopters, some who are more cautious but curious, and third, people who reject this idea. Let’s talk to the early adopters first. What do they need to know about carbon programs to make good economic decisions for their farms?
KM: It’s about the data you need to make this decision. That’s where FBN is really focused. We want to make decision that enhances ROI. So, everything we do as a company and with our farmers is ROI-focused. This approach really applies to climate problems. If you plant cover crops, or do notill, or low-intensive types of operations, all those have costs and benefits associated with them. Part of our ground truthing of this project is to really say, when you adopt these practices, what are the pros, what are the benefits, and what are the costs? How do you weigh those two?
Some farmers are already going to know that, the type who are really eager and early adopters. They’re probably more of the science-type people who have done these experiments on their farm and know what those costs are. They’re going to be able to come to the table much better informed to make those decisions.
At FBN, we’re trying to build those experimental situations so farmers can easily answer those questions.
SF: Let’s talk about the second group of people who are cautiously curious. This isn’t something they’re considering for next growing season, but they’re open to learning. What should they be keeping their eye on?
KM: I think it’s going to be very much a localized or regionalized situation. Because it’s so wide open, there’s no one dominant force. I think farmers will learn from their own neighbors, to some extent. Whether its through the farmers they interact with or going through Extension at the university level, those are the people they want to turn to and ask, ‘What was your experience? What did you find when you did this?’ That’s where they’ll get the crucial anecdotal data that will help them make decisions. I just encourage farmers, if they’re not early in this process: Have your ears open, listen to others and their experiences, pose questions to them.
SF: Are there things cautiously curious farmers can be doing now to dip their toes in the water without making a commitment in the carbon market?
KM: Farmers have a great lab out their back door to test some of these things. Do cover crops help you? What does the practice cost? Does it enhance your soil value? Be an experimenter around the types of practices that are going to be carbon sensitive as we move forward.
I’d also say, talk to your neighbors who are doing it. Talk to your Extension service. I imagine many universities are going to be investigating this at a deeper level. Try to gather as much data as possible, whether its from your own farm, your neighbors, or the university to help make those decisions.
SF: What role does FBN have in helping farmers connect and learn from each other?
KM: We’re a data company. We value data and know it’s crucial to making decisions. Those decisions are going to be based on ROI. We are actively working on building out our data network of farmers and data around these types of practices.
We can basically crowdsource a lot of data from farmers who are doing these types of practices and really start to ask controlled experiment types of questions. For instance, if I plant a cover crop in northwest Iowa, what have we seen as the yield impacts? Those are the kind of controlled experiments you can do when you have a large network of farms, and that can be very valuable in these kinds of decisions.
SF: Both with carbon-sensitive practices, and agriculture more broadly, there are so many unknowns. It’s been a year since many have gathered in person for trade shows or meetings. If you could sit down with stressed farmers, what would you say?
KM: This is actually a time for a lot of optimism. I think the last few years have been pretty bleak in agriculture. Markets have really been in the tank. We’ve had trade wars that have stymied us. I think a lot of those things are really behind us now. I know we are still in the pandemic and struggling with COVID, but I think there’s a pretty clear game plan for how we’ll get out of it.
I would share with farmers, this is really going to be a good time economically in the next couple of years. We see forward prices on the board in Chicago are really strong right now. I expect them to keep getting stronger because of those strong buying patterns from China.
I would encourage farmers to look at your farm operations and start making strategic investments. Interest rates are exceptionally low, and I expect them to stay that way for a while. It’s a really good time to take a look at your farm operation and say, where do I want to be in two to five years down the road.
On the issues of climate and what USDA is going to do, I don’t think it will be a mandate. I don’t think you’re going to be forced into doing anything that you wouldn’t want to do. I think it’s actually a pretty good time to be a farmer right now.