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This is not 2008 or 2012, it is 2017 in the agricultural economy. What worked then may make you go broke now. All farmers but especially young farmers need to rethink how they move forward in a high cost, low return environment we find ourselves in. Inputs now need to more than pay for themselves. Back in the “good old days” anything that added to yield would probably pay for itself. Now farmers are faced with more expenses then the crop is worth.
The best way to describe the most economical yield is that it is a moving target dependent on the gross dollars per acre you can receive on that farm. Gross being yield times price. And, as we know price has dropped down considerably. What worked in 2011 may not work in 2017, what worked in 2013 may not work in 2018. and, if we get a rally in prices then the most economical yield will change again.
The other thing that is not always figured in is that back when times were very good farmers made purchases with future commitments that still need to be paid. Those are now fixed costs that need to come out of the gross. So with a lot lower gross something has to give somewhere. Farm income is at a seven year low. We have to re-learn how to produce as much as we can as cheap as we can. Inflation adjusted price for wheat is the lowest it has been in 400 years. Some farmers are now calling wheat ‘poverty grass”. Land prices are under pressure. Inflation adjusted corn prices are lower than the late 1990’s/early 2000’s. Expenses need to go back to 2000 levels and keep today’s higher yields to be even with 20 years ago. And, remember 20 years ago we were getting big LDP payments in corn and soybean country. Government payments are not near that big now. Different world we find ourselves in. What is keeping U.S. farmers going? Low interest rates, high land prices, which are keeping the ability to borrow funds available and at a low cost. And, the good profits that were made for several years.
Things can change in a hurry though. The cattle market took a really big hit with cattle feeders taking record loses and then in the matter of a few months prices went back up and feeders were netting over $300 a head.
It is always darkest before dawn or as I call it the 4 a.m. struggles. What will change the commodity markets around? Who knows what or when but change they will.
I also keep hearing that the overall economy is getting long in the tooth. I really do believe if Hillary had been elected we would be in a recession by now. Only the prospect of a Trump tax cut and regulation roll back is keeping the economy moving along. Yes we had a lot of years in a row where the economy moved forward but never at a 3% yearly rate. And, this was done with massive government debt increase and central banks keeping interest rates very low.
Now all kinds of ag experts are giving all kinds of advice. Some of the same ones 10 years ago that were saying go-go-go. Are now talking about how long the downturn will last. Reminds me of a hog story.
What about land prices. They are interest rate sensitive and profitability sensitive. Lots of ground could change hands in the next 10 years, but I have heard that before. Does not mean it will not be true this time, but where will the heirs invest the money? I know some will blow it, but others will view ‘grandpa’s” farm as a really neat investment. If the baby boomers who inherit it sell the farm there are 3 things they need to think about. 1. How much taxes do I have to pay? 2. Where do I now invest all that money? 3. What about the loss of capitol wealth?
Back to most economical. One does not want to be caught too short if prices do rise, but cannot be too long in the expense column if prices stay the same or go lower. Until commodity price trends change to the upside and over a multi-year period farmers and ranchers have to become more efficient. More with less.
You also need to be careful about prepaying loans. We need to build cash. Another hog story. Too many of us have no short term cushion to ride out an extended downtrend. I know we all would like to eliminate as much debt as possible but remember short term liquidity. Understand your operations short versus long term debt and lock in interest rates at these lows rates.
Most operations it is the “short run”, 3 to 5 years that will get you. Things do have to change. Either your operation or the Agricultural Macro Economics compared to 2007 to 2014. Remember expenses need to go back to 2000 levels or prices need to improve. Can you cut expenses to 2000 levels?
So what about the cavalry coming over the hill? My local FSA office in the early days of LDP payments had 12,000 LDP program applications in one day. It was Columbus Day when the market rallied and farmers had a chance to make some money on the spread. But that was different times, at a different price level and different farm economics. Farmers also had double direct payments for awhile as Bill Clinton and Newt Gingrich fought over the rural vote for control of the House of Representatives. ARC and PLC have not been near as much help as farm program payments were 12 to 18 years ago.
Government is 20 Trillion Dollars in debt. Input suppliers do not want to see a return to big CRP acres. Environmental Working Group, Animal Welfare Groups, Anti-glyphosate groups, Anti-GMOs, and other groups on both the left and right that want lower government payments to farmers. I just don’t see a huge increase in outside price support money coming into agriculture.
Agriculture has to get more economical. All of us, because the pie (commodity prices X yield) is only so big and in the end it has to add up to more than zero. And, as our operations get bigger one way or the other from breakeven adds up faster than it ever did. As tax reform moves through government that could change how we do some things. Local and state taxes are also a burden that will only probably go up at the same time that agriculture needs fewer and fewer resources from our local governments.
Agriculture cannot continue to lose money out into the future. Lots of experts were saying the downturn would end by 2018, now some are saying 2019 or 2020. We have to get to breakeven plus as soon as we can. From what I am hearing lots of grain operations cannot go past 2018 losing money. Livestock is in a little different boat, but it to has to stay profitable. Huge soybean yields coupled with $10 prices bailed us out in 2016. But we cannot keep banking on a buzzer beater to keep us afloat every year.
If we get a big weather event such as a huge drought that would raise prices for 2 to 3 years. That may buy enough time to get world commodity inflation up. Or a huge world wide war and the resulting inflation that would bring. Or after 2-3 years we are right back where we are now.
Best part of all of this is that things will not stay the same way forever. We do have price rebounds even though long term trend is not up.
Long term commodities are commodities and the price trend has been down. Unless, the General Public makes us go back on technology and then prices may rise for while until we learn how to over produce in that environment. I know I keep hearing but-but-but. But long term trend for the last 400 years has been down. I’ve been told North American grain prices have been in an inflation adjusted down trend since 1774. We used to light lamps with expensive whale oil and then along comes oil out of the ground. Trend is down we must become more efficient. And, in the long run we will need help from our input suppliers and other agribusinesses that sell production tools to farmers and ranchers. Also amazing even with all the modern technology people are still competing in subsistence agriculture. Half the world’s cotton is still harvested by hand.
There is also a point where volume does not make it up enough. Most economical depends on price in the end. Long term we need to get economical and probably lower than we are now. We are not alone in this commodity price deflation, look how far oil prices have fallen. And oil fracting continues to get more economical all the time.
Remember this all can change 2005 corn cash price was really low that fall by summer of 2008 it was at all time highs.