News Worth Knowing – April 17, 2024

Terrain analysts dissect news topics important to agriculture and weigh their significance for the sectors relevant to our Farm Credit customers.

In this issue, our analysts discuss credit card debt, almond farm bankruptcies in the Central Valley, and what the pending Kroger-Albertsons merger could mean for farmers.

For commodities with few intermediary steps between the farm and the fork, the financial health of U.S. consumers is particularly important.

Will Credit Card Debt Derail the Consumer?

Matt Clark, Senior Rural Economy Analyst

Overview: The level of U.S. consumer debt is a hot topic. With credit card balances recently surpassing $1 trillion, various agricultural groups I’ve met with have expressed concern that U.S. consumer health will weaken sharply. For commodities with few intermediary steps between the farm and the fork — such as vegetables, wine, beef, cheese, and tree fruits and nuts — the financial health of U.S. consumers is particularly important.

Notable Quotes:

“The nation’s mounting credit card debt threatens to swamp its savings. More than one-third of American adults – 36% – have more credit card debt than emergency savings, according to an annual survey by Bankrate, the personal finance site. In more than a decade of polling, the figure has never been higher.”

– “Our Credit Card Debt Threatens to Swamp Our Savings,” a March 10, 2024, USA Today article

“Credit card delinquencies surged more than 50% in 2023 as total consumer debt swelled to $17.5 trillion, the New York Federal Reserve reported Tuesday.”

– “Credit Card Delinquencies Surged in 2023...” a February 6, 2024, CNBC, article

“Consumers who carry credit card debt are also feeling the impact of higher interest rates, which have been pushed upwards due to the Federal Reserve's flurry of interest rate hikes. That's making it more costly to carry a balance on a credit card, with [Bankrate senior industry analyst Ted] Rossman noting that the average credit card annual percentage rate is at a record 20.74%.”

– “Americans Owe a Record $1.1 Trillion in Credit Card Debt, Straining Budgets,” a February 6, 2024, CBS News article

Takeaway: The nominal level of credit card debt combined with the sharp uptick in delinquency rates for credit cards is very concerning but not yet at a crisis level. For example, my analysis shows that:

• Current credit card delinquency rates remain below the 2000 to 2019 average
• Adjusted for inflation, total credit card debt is only about 4% above the 2019 average (and below the peak observed in 2008)
• The ratio of credit card balances to disposable income and the ratio of credit card balances to total compensation earned are slightly below the 2019 average

So, for producers with direct-to-consumer products or products with limited processing, the current trend in consumer debt is very troubling and may indicate some future pullback in spending and moderate stress. However, the data does not currently indicate a complete crash in consumer health.

Sector Impacts:

• Fruit, Nuts & Vegetables: Domestic demand for many specialty commodities has been weak relative to the export market. Higher credit card delinquency rates among Americans could be an indication that this trend will continue.
• Beef & Pork: Meat remains at the top of the list of items in shopper’s grocery carts with a high cost per unit. Despite fears of consumers trading down or limiting quantities purchased, rising wages and U.S. job growth have provided resilience to per capita monthly meat spending, especially for beef.
• Grapes & Wine: Rising costs to service credit card debt reduce discretionary income and could dampen consumer confidence and willingness to spend on discretionary products such as wine. While debt levels may not be onerous enough yet to have a material impact on wine sales, it is a metric to watch as the year progresses.
• Grain & Oilseeds: Consumer expenditures on retail cotton products such as textiles and apparel continue to decline. Because consumer financial health is one of the main drivers of cotton product demand, a pullback in spending would lower demand for cotton products and therefore cotton prices.

The combination of low nut prices and high growing costs since the start of the pandemic has driven profitability to new lows.

Bankruptcies Raise Concerns Over Land Values in Central Valley

Matt Woolf, Ph.D., Specialty Crop Analyst

Overview: The high profitability of nut crops in the 2010s led many generational farms and outside investors to plant almonds and other nut crops. Recently, however, the combination of low nut prices and high growing costs since the start of the pandemic has driven profitability to new lows, leading to some high-profile bankruptcies and an increase in property listings.

Notable Quotes:

“Prices for premium almonds have dropped from nearly $4 a pound a decade ago to about $2 a pound or less. … Though the low prices are affecting all growers, those that are being hit especially hard are the many investor groups that bought land when prices were high and now have large debts.”

– “After Years of Rapid Growth, California’s Almond Industry Struggles Amid Low Prices,” a March 4, 2024, Los Angeles Times article

“‘There’s a lot of land on the market currently and likely hitting the market soon,’ [Schuil Ag Real Estate President Doug] Phillips said. ‘There’s only so many buyers out there, so there’s a good chance that will have an effect on land values with much more property on the market than there are available buyers.’”

– “One of CA’s ‘Largest Almond Growers’ Files for Bankruptcy...” a February 22, 2024, GV Wire article

Takeaway: Farmers in the Central Valley have become concerned about the supply-demand balance in the property market. On the supply side, listings have ticked up and are likely to continue this trend given recent bankruptcies. On the demand side, sales activity has slowed as buyers price-in higher interest rates and future groundwater restrictions. Increased supply and dampened demand could mean lower land values as the market rebalances.

Sector Impacts:

• Fruit, Nuts & Vegetables: Farmland values in the Central Valley appear to be responding more and more to the low profitability of certain nut commodities in recent years. Given my forecasts for profitability to remain low in 2024, it is likely that land values will also remain dampened.
• Beef & Pork: As some growers are forced to exit the nut business and land values potentially decline, livestock and dairy producers in the Central Valley may benefit from some acres being moved out of nut production. These acres could potentially be transitioned into crops with lower inputs and water requirements, such as forages and cereal grains.
• Grapes & Wine: Softness in the market for almonds and other nut crops and declining land values have important repercussions for wine grape growers, as tree nuts have historically been an alternative land use in many areas of the Central Valley where grapes are grown.
• Grain & Oilseeds: Although this particular article focuses on the Central Valley, this is not an uncommon story for agriculture in general. The USDA predicts U.S. net farm income will decline 25.6% in 2024 because of lower commodity prices and rising production costs. Similar to the Central Valley, if negative profitability persists in the Midwest, it could lead to lower land values.

In these types of arguments that go beyond the consumer, harm to farmers likely means lower prices, and presumably tighter margins, due to lack of leverage within the supply chain.

Kroger-Albertsons: Lower Prices v. Lower Competition

Dave Weaber, Senior Animal Protein Analyst

Overview: The Federal Trade Commission (FTC), eight states and Washington D.C. have sued to block the merger between Kroger and Albertsons. The two supermarket chains contend the deal is critical to survival in today’s grocery business amid stiff competition from Amazon, Walmart, Costco and dollar stores, while the FTC argues the deal would “eliminate fierce competition” for shoppers and workers and raise grocery prices, according to NPR.

Notable Quotes:

“Kroger and Albertsons, trying to convince regulators that the merger wouldn't reduce local competition, had agreed to sell hundreds of stores in overlapping markets to C&S Wholesale Grocers.”

“When Albertsons itself merged with Safeway in 2015, for example, the FTC required it to sell off 168 stores as part of the deal. Within months, one of its buyers filed for bankruptcy protection and Albertsons repurchased 33 of those stores on the cheap.”

– “FTC and 9 States Sue to Block Kroger-Albertsons Supermarket Merger” a February 26, 2024, NPR article

Takeaway: Mergers driven by the desire to chase economies of scale, increase shareholder returns, and potentially lower costs to consumers at the same time may now have to overcome other thresholds.

In this particular case, the FTC criticizes Kroger and Albertsons’ plan to divest hundreds of stores, claiming, “C&S would face significant obstacles stitching together the various parts and pieces from Kroger and Albertsons into a functioning business—let alone a successful competitor against a combined Kroger and Albertsons.” By widening its scope and focusing on divestitures, the FTC could open avenues for arguments against future mergers to include farmers, investors, and a whole host of social issues.

In these types of arguments that go beyond the consumer, harm to farmers likely means lower prices, and presumably tighter margins, due to lack of leverage within the supply chain. Additional commitments by retailers on the sustainability and ESG (environmental, social and governance) front — or government mandates in these areas in exchange for merger approval — could simultaneously add to the cost of production for farmers and other supply chain participants without offsetting price increases to consumers.

Sector Impacts:

• Fruit, Nuts & Vegetables: Data has shown that the 2022 domestic almond retail price was above its 10-year average while the grower price for the same year was well below its average over the same period. With the industry still working through a buildup of inventory, some producers have expressed more concern than usual about how prices are determined further down the supply chain.
• Beef & Pork: Recent actions and proposed regulatory changes by the Packers and Stockyards Division regarding livestock producer vulnerability to real or perceived antitrust or anti-competitive behavior could potentially be used as an argument to block mergers and acquisitions along the supply chain. This could result in the inability of free market economic forces to signal or remove extra or burdensome costs from margin operations in the supply chain, thereby limiting prices for the fixed-cost producers in the chain.
• Grapes & Wine: Consolidation among wine wholesalers and retailers has reduced opportunities for small and midsize wineries to sell their products through the three-tier channel. Mergers such as the one between Kroger and Albertsons could make it even more difficult for them to participate in this sales channel.
• Grain & Oilseeds: Mergers of large retailers may eventually translate into opportunities for farmers to take advantage of value-add products such as “sustainably raised” or “low-carbon-intensity” products. Large companies have the scale and technology to create value-add brands working with their supply chain from the producer to the grocery store.