MyFarmLife.com

A Soft Landing for the Agricultural Economy

Most ag industry watchers think a belt-tightening is due, but the overall long-term outlook for the farm economy remains bright.

By Des Keller

Factors such as slowing ethanol production and a reduction in exports mean less demand for farmers.

Factors such as slowing ethanol production and a reduction in exports mean less demand for farmers.

“Caution Ahead” signs have been posted for the farm economy, according to economists, bankers and agribusiness professionals. The boom of the past eight years isn’t unraveling but it is slowing—the result of increased production worldwide, a leveling or rollback off ethanol requirements in the U.S., and slightly less demand from countries like China.

Certainly, the trend the past several years has been very positive for agriculture. The average price of corn in the U.S. in 2005 was $1.96 per bushel. In 2008 it was $4.78, and in 2012, when drought gripped much of the U.S. and lessened yields, it was $6.67. What other industry can boast a product that sold for nearly 3½ times as much as it did seven years earlier?

As the old farming maxim posits: “The cure for high prices is high prices.” Take, for instance, corn.

“Corn couldn’t keep going up and up,” says Michael Swanson, chief agricultural economist for Wells Fargo Bank. “Stories that people tell of higher—or lower—prices without limits don’t build in the basic feedback loops that constrain higher prices or runaway lower prices.

“If cash prices in the Midwest for corn are $4 to $5 per bushel, there are lots of places in the Ukraine and South America, [where] they look at what it would cost to import those crops, and say, ‘Heck, we can do that.’”

As Swanson notes, producers worldwide, including many in the U.S., have responded with increased production, and prices have lessened as a result. In the past eight years, the world has added 147 million acres of farmland. To put that in context, that’s equivalent to five times the amount of land farmed in all of Iowa.

“Farmers across the globe have responded to demand, and those additional acres rarely disappear from production,” says Jason Henderson, director of Extension and associate dean for the college of agriculture at Purdue University. Further increasing production, says Henderson, is that “other parts of the globe are adopting our technology as fast as they can.”

Additionally, the demand for ethanol in the U.S. is set to hit a plateau. Currently, more than 40% of the U.S. corn crop is used to produce ethanol—the result of federal mandates. Those mandates cease to rise, and may even decrease, in 2015 and remain level through 2022.

“No more ethanol plants are being built at this time in the country,” says Scott Irwin, an agricultural economist at the University of Illinois. “Without some change in legislation, we’ve seen the big growth in the ethanol industry in the U.S.”

As ethanol production will slow, so too will exports, say the experts. In the U.S., agricultural exports are forecast by the USDA’s Economic Research Service to drop to $137 billion—down by almost $4 billion from last year’s projected record. Nearly 25% of U.S. production is sold overseas, whereas some 45% of Canadian agricultural production is destined for foreign markets.

A big factor in the reduction of overseas demand is China, where as much as 18% of total U.S. agricultural exports are now sold. One reason for China importing so much food is its economy has grown at a 10% clip annually for a decade. That the growth may slow to only 7.5% for the next few years makes the pullback feel, perhaps, more precipitous than it actually is.

Such declines in the rate of growth, coupled with beefed-up world crop production, can cool off commodity prices for everyone. A barometer of the change can be seen in farmland prices.

“We’ve already seen some softening a bit,” says Brent Gloy, director of the Center for Commercial Agriculture at Purdue University. “I think we are on the verge of hitting one of those plateaus in terms of average land prices. There are still sales in the $15,000-per-acre range, but they are starting to soften a bit, and wisely so.”

Wise or not, a downturn in commodity prices can hurt the financial position of someone who bought land at the high end, especially at a time when farm income is predicted to decline, albeit from record highs. In the U.S., net farm income is predicted to drop from $120 billion in 2013 to $93 billion in 2015. As for Canada, after a year-over-year increase of 14% in 2012, net cash income for farms was projected to decrease 1% from the year before, but still at a near-record level. (Projections for 2014 were not yet available at the time this issue went to press.)

“The business will continue to cycle,” says Steve Koep, vice president of sales, AGCO North America. “We think, though, that it will cycle at a different level than in the past,” noting that, generally speaking, the downturns won’t be as deep as in the past. Even so, Koep contends, a dip of any kind is cause for machinery manufacturers and dealers, as well as their customers to take stock of their operations, perhaps reducing costs, maximizing savings and squeezing more out of every dollar.

“I’m generalizing a bit here,” continues Koep, “but farming is a quest for increased efficiency. Farmers count on us to develop efficiency tools, and we can do that in a number of ways. We can and have developed a tractor that gets better fuel economy, that uses resources better. Or we can develop, for those who choose to go this route, a piece of equipment for commercial application that allows growers to hire someone to do that job, which may make the overall operation more efficient.”

New, more productive tools and global economic ties notwithstanding, regional, even hyper-local factors still have tremendous bearing on the success of producers. Take the case of Kansas.

Much of the state has suffered through three straight years of drought. So while commodity prices have been buoyant generally, farmers here have been working hard to get any crop at all, says Brian Lang, president of Lang Diesel, an AGCO dealership with 11 locations across Kansas. “We can have a dip in the market in 2014, but if we get more rain it would still likely be much better than 2013,” he says.

As a result of the drought, Lang says farmers in Kansas have already been cutting back, and that offers a model for what other North American farmers may do in the next few years. “You look at operating [expenses] when business is good, when the market is good,” he says. “You probably aren’t quite as efficient as you typically are.

“During more lean times,” he continues, “you go back in and you look at areas where you become more efficient, and I think that’s what you’re going to see in the next two years.”

Alan Crane, one of Lang’s customers, looks for efficiencies in good times and bad, through investments in his operation that allow him to do more himself. For instance, he makes sure he has enough equipment to do most every job that exists on his farm. “Time is money,” says Crane, whose family has been farming wheat and row crops near Larned, Kan. for six generations. “If we have to hire out work, that seems like a good way to lose money. If I want to lose money, I can do that by myself,” he laughs.

Even with the negative influences exacted by slowing growth and lower commodity prices, several factors, including available credit and stable energy prices in the near term, will continue to buoy the farm economy. The overall outlook remains strong, say many whose business it is to keep an eye on the agriculture economy.

“One big reason for optimism is the demand for protein around the world,” says Koep. China needs more corn and soybeans to help feed its huge population, many of whom have more money than they used to and desire more meat in their diet as a result.

“So we’re hanging our hat on the protein ladder that emerging nations are moving up,” says Koep. “The demand for grain will continue to increase.”

“The system is always much more complex and resilient than we give it credit for,” says Wells Fargo’s Swanson. While $4-per-bushel corn and $10-per-bushel soybeans aren’t as exciting to U.S. farmers, they do some good for other U.S. farmers that use those crops as feed, such as dairy and poultry producers.

“Those dairy and poultry products, for instance, will then be able to be more competitive in export markets around the world,” says Swanson. “Just because prices have cooled doesn’t mean agriculture here overall will receive less income. It will just be different income.”

Purdue University’s Gloy agrees the big picture is favorable, but by comparison to the recent past, the next few years may only seem a little dim. “It’s just that the last seven years were really good, phenomenally good. I think the future is very bright in agriculture.”