Is US Agriculture in a Recession?

Dr. Ken Rietz

It is certainly theoretically possible that an entire sector be in a recession, and even that different subsectors be more in a recession than others. There are, of course, several questions: What are the signs that a sector is in a recession? What indications would support that assertion, or weaken it? My answer is that some sectors of agriculture are in early recession, and some sectors are not in recession, but overall, agriculture is moving that direction but is not fully there. My first piece of evidence is a graph from AgWeb which demonstrates that net cash farm incomes are on the decline. Please note that in this graph the estimate for 2024, as noted in tiny script at the bottom, has been changed significantly due to large increases in the price of beef and eggs. Note that the revenue for 2024 is still expected to decline, though. The drop in 2023 is, however, accurate.

Figure 1: Net Cash Farm Income. Source: USDA

You have probably heard that China is buying up farms, and you might wonder how much of a factor that is in the previous graph. The answer is that there is no noticeable effect on total income from that.

The Bureau of Economic Analysis (BEA) is the authoritative voice determining when a recession happens, and the BEA does track sectors as well. There have been eight contractions, but only two recessions in the agricultural sector in the past 25 years or so, making it clear that there is a distinction there, and showing that calling a recession too soon is very possible, especially in an overheated political environment.

So, what are the signs of a recession? The list is very long, and comes from multiple sources. Here is an abbreviated list.

• Lower prices on crops have reduced revenue in those areas and caused pressure on leveraged producers. This is illustrated by the three graphs just below, Corn, Soybean, and Wheat front month futures respectively, for 2022 (blue), 2023 (red), and 2024 (black).

• The drop in farm revenue in 2023 was the largest in history.
• Not just farm incomes have dropped, but Ag suppliers and manufacturers are laying off people.
• The prices of labor, transportation, and marketing are expected to rise, further suppressing farm income.
• If the recession spreads into the whole economy, people will adjust their selection of foods, usually selecting lower-priced items, skewing demand and lowering revenue.
• Some commodities are more economically elastic, and therefore demand for them drops when disposable income sags. Among these are cotton, specialized meats, high-end vegetables, and dairy. Other agricultural products are inelastic and will be purchased even when disposable income sags. Among these are poultry, eggs, wheat, and peanuts. Those commodities would be least likely to contribute to a recession.
• The Farm Bill expires at the end of this month, and its renewal, as of the time of writing, is not guaranteed. Failure to extend the Farm Bill will cause significant problems for farmers.
• Exports are likely to decrease, at least in part because China’s economy is slowing, and the US provides a considerable portion of the food imported by China.
• The August Ag Economists’ Monthly Monitor asked economists if they thought US agriculture is on the brink of a recession or already in one. Slightly more than half of them said “Yes”.

The crops subsector of the agricultural sector is facing serious challenges right now, while the animal subsector is actually doing quite well, at least in part because feed grain is so cheap. According to AgWeb, in 2015, only 22% of farms raised both crops and livestock (mainly cattle). If that trend continues, less than 20% of farms raise both crops and animals. The rest raise only one or the other. The amount of farmland used for pasture and the amount devoted to crops are about equal. The estimate then is that the roughly 40% of farms that raise only crops are feeling the effects of a nearby recession, the rest of the farms raise cattle and other animals, and they are not as tightly squeezed.

The trading and investment implications can get complicated. For about a year, we expect that grains will continue downward to steady, but that meats and eggs will probably be stable to increasing. See the elastic and inelastic foods in the list above for more specifics. The outlook for more than a year from now is dependent on many factors, but most likely grains will recover because farmers will shift away from them and live off of stored grains while growing less grains.