Prospective on the Harvest

The fall harvest in the U.S. has been very bountiful, even reaching record levels with some commodities.  This oversupply has pushed wheat prices to a low for the decade, and corn is still at under 50% of what is was in 2012.  Cattle and hog prices have also dropped.  The low prices combined with higher input and finance costs are making some farmers wonder if they will be able to stay afloat. 

A lot of the farm economy may rest with President Trump and a new Congress, which will have the job of crafting a new farm bill.  These are trillion-dollar, twice-a-decade monster that will set subsidies and can broadly shape the life of the individual farmer.  For the producer, the margins can make a big difference to financial reality. 

Even with the rising costs and declining commodity sales, it was not long ago that farmers’ and ranchers’ wallets were fat.  We saw record profits in 2012 and 2013, exceeding $116 billion, in 2009 inflation adjusted dollars.   But the drop has not been as severe as drops in the 1930s and 1980s, but so far, it has been a return to the levels seen in the 1960s and 1990s, two relatively quiet times in American agriculture.  The challenge that we face now is that producers were getting used to prices that were too high for too long.

Input costs are starting to come down.  Fertilizer and fuel have dropped.  Seed and machinery are the two that resist coming down because of the infrastructure involved in those areas.  Seed costs will eat more revenue in an area of GMOs.  Since 1995 seed costs have increased by 87.5% with the GMO corn, soy, and cotton.  Now the average seed purchase exceeds 4.5% of the farmers’ gross income.  Equipment spending which was crucial to decades of farm mechanization, collapsed in the 1980 farm crisis from its high of 8% of farm gross income.  This has averaged around 4% of farm gross income over the past thirty years with an exception of a run up to 5% with the price peak in 2012-2013. 

Organic food spending is continuing to climb.  The Great Recession slowed annual sales growth from 19.2% to a low of 4.3%.  That level has risen to 10.6%.  The growth rate is phenomenal when total organic sales were under $10 billion in 2005 and sat at $39.75 billion last year.  Some of these smaller farms are making more profit than a non-organic farm that may be a hundred times their size.  Many organic farms also benefit from lower annual input costs once the initial infrastructure has been put in place.

A major push for the corn market came from the renewable fuel legislation passed in 2005 and 2007.  This dramatically increased the mandate for U.S. ethanol use.  In 1990, around 5% of the nation’s corn was used to make ethanol.  This peaked at just over 40% in 2012.  This has dropped to around 38% currently.  It is expected this level will remain constant at it is currently.  This will not provide the extra demand that helped run up corn prices in the past decade. 

Land prices increased with the rising commodity prices and inflation of the 1970s.  That increase is nothing compared to the ethanol fueled farmland boom of the 2000s.  Farm real estate in Iowa averaged around $4,000/acre, in 2009 adjusted dollars, in 1980.  In 2012, this average was up to $8,000/acre.  Land prices have dropped since that peak slightly. 

A combination of the lower commodity prices and higher operating costs are increasing some debt levels for the farmer.  We have seen farmers dip into equity or increase borrowing to continue operations.  This is causing debt to equity ratios to rise in the farm belt from the low ratios we saw in 2012.  There is a push to get bigger to cover the increased fixed costs. 

Exports and federal farm payments have helped the farmer’s income statements but both have limits.  Free trade can give access to new markets for farm products but it also exposes them to foreign competition.  Exports have risen substantially until a peak of 2009 inflation adjusted $140 billion in 2012.  This will drop to around $119 billion this year.  Much of the drop can be attributed to a drop in the commodity price and not a drop in the volume of product shipped abroad. 

Congress had received pressure to pass emergency farm aid in bad years from the 1980s to mid-2000s.  The new programs have made the subsidy payments more automatic.   Overall the subsidies will not prevent the producer from losing money but can help control the depth of the losses. 

Overall, in the next two to three years it may be a challenge for the farmer to break even.  It may not be a repeat of the farm crisis of the 1980s but it still will be a long way away from the days of lush profits we saw just a few years ago.  Producers who are able to smartly leverage technology, control input costs as much as possible, resist the temptation to leverage up, and who seek newer and smarter ways to farm, will be the ones who operate well in the current paradigm.