‘The Recession is Over’ Says Ag Economic Expert

After observing a dramatic change to the farm sector outlook over the last several months, Industry & Economic Outlook Conference (IEOC) presenter Eli Lustgarten has issued an update of his ag equipment outlook for National Fluid Power Association members.

By Eli Lustgarten, President, ESL Consultants

At the end of all my presentations on the farm sector, I always state that weather was the ultimate key variable. At the 2020 NFPA IEOC, I also noted that the problems in 2020 were being further exacerbated by the China tensions, the COVID-19 pandemic, and the uncertain political outlook and the resulting economic policies.

All these factors have changed! The dramatic reversal of the negative influences on the farm sector literally began during the NFPA IEOC. The result has been the end of the farm equipment recession and a high probability of at least a double-digit gain in demand in 2021 rather than the projected modest improvement; Happy Days Are Here Again.

What happened

At the NFPA IEOC, the underlying fundamentals suggested that 2020 would be the seventh year of the farm recession:

• Great yields and increased acreage for the past six years translated into bumper crops and excess U.S. carryovers depressing commodity prices.
• The optimism surrounding the fall 2019 China trade deal was impacted by the rising tensions of the trade war and the African swine flu outbreak in China, resulting in the destruction of up to 50% of their hog herd.
• The COVID-19 pandemic dramatically reduced U.S. and global economic activity.
• Uncertainty was increasing about the political outlook and economic policies.

As the NFPA Aug. 11-13 IEOC came to an end, a major weather pattern called a derecho developed beginning Aug. 10-11 and rampaged through the Midwest, significantly affecting Iowa, Nebraska, Illinois, and Indiana. (A derecho is a widespread, long-lived, straight-line storm with 100+ mph winds, extremely heavy rains, and an occasional tornado). Over the next few months, we learned of the widespread damage to tens of millions of acres impacting the corn and soybean crops that were still in the ground. Compounding the developing problems was the impact of dry weather over the summer in several regions and rising export demand as global economies began to recover. The bottom line was a less-than-robust harvest than what was projected in the July USDA WASDE (World Agricultural Supply and Demand Estimates) report published Aug. 12. Further impacting the farm sector was an increase in demand for wheat, corn, and soybeans reflecting the COVID-19 effect of higher consumption of dinners and baked goods at home. As we entered the fall, the crop forecasts of corn and soybean carryovers and prices changed dramatically.

Further, China demand picked up markedly as the hog herd was being rebuilt and evidence was unfolding of much tighter crop carryovers and rising commodity prices.

Consequently, the unfolding tightening of commodity supplies and rising commodity prices translated into a sharp rise in farmer optimism as the outlook for farm cash receipts/income improved. This set the stage for the recovery of farm equipment demand as fall arrived, which will likely continue well into 2021.

Revised Forecast: Double-Digit Demand Improvement in 2021

The vastly improved fundamental in the farm sector has resulted in a major turnaround in farm equipment demand in the latter part of 2020. This improvement will carry well into 2021 helped by the sharp reduction in field inventories, which will have to be rebuilt over the next year.

Eli Lustgarten, President of ESL Consultants and popular IEOC speaker, has been sharing his insights about our industry’s key customer markets at NFPA’s Industry & Economic Outlook Conference for over 20 years. Besides his Fluid Power Customer Market Overview presentation, Lustgarten employs his advanced industry analysis and ties to industry peers at many ag equipment manufacturers to also deliver an Agriculture Machinery Forecast presentation.

ESL Consultants is an industrial consulting firm assisting trade associations and individual companies to better understand the outlook for their end markets both domestically and worldwide. With over 30 years of economic research experience, ESL Consultants is widely recognized in the fluid power industry.

Contact Eli Lustgarten at eslustgarten@aol.com.

For more information on IEOC, visit https://nfpahub.com/events/conferences/the-ieoc/.