Jan 8, 2019

Why the Ag Economy Should Matter to Non-Farmers

For the last six years, many farmers and others who work in agriculture have been struggling.

The price they’ve been receiving for the crops they’ve been raising has been low – in some cases it’s half of what they made during what’s known as the “super cycle” of 2006 through 2012, a time when many grain producers enjoyed unparalleled prosperity. Yet their costs to grow that crop continue to rise.

Many Midwest producers are now experiencing four to five consecutive years of depressed commodity prices, which have severely compressed profit margins to razor-thin levels for some and resulted in negative profits margins for others.

Trade war issues are also affecting many farmers’ and ranchers’ financial health. When trade issues arise, agriculture, unfortunately, is almost always the tip of the spear. Twenty percent – or $1 out of every $5 – of net farm income comes from trade. It’s a very big deal. A substantial $2/bushel drop in soybean prices means a revenue loss of $100,000 on 1,000 acres of soybeans yielding 50 bushels per acre. It’s a painful reduction at a time when margins were already thin – or even negative – for many operations.

While a major weather event can change things quickly, unless that happens, producers are being told not to expect a huge price rally in most commodities.

One thing that has helped farmers over the past few years is that they’ve been able to harvest larger-than-average yields. Even areas that have had less-than-ideal growing conditions have been able to produce better-than-anticipated crops. Technology and improved genetics appear to kick in on the lower end of agronomic conditions. Still, many are concerned producers will not be able to sustain the “above-trend-line yields” of the last four to five years, and we could be one “average yield” away from real financial problems for some.

Why does this matter if you’re not a farmer?

The biggest reason is that agriculture tends to lead the general economy into a recession, and agriculture is in a period of transition that’s placing a lot of pressure on economics.

Agriculture also influences urban economies. When producers have more money, they spend much of it, and a strong farm economy would likely give the struggling retail economy the boost it needs.

As farmers look for more ways to diversify their income, some are turning to more value-added or niche farm operations to meet rapidly changing consumer demand – especially that of millennials who desire and are willing to pay a premium for personal customized experiences instead of simply buying products.

More farmers are looking for investors to buy land and then rent it back to them. For now, land values have remained firm. Forecasts for increasing food demand and a rising global population have led investors to see owning farmland as a good long-term investment.

The American public has a limited understanding of just how little the farmer actually gets for each food dollar. In 2016, the farmer’s share of the food dollar fell to 14.8 cents – down 4.5 percent from the prior year, according to the U.S. Department of Agriculture. Farmers’ share of the food dollar for food consumed at home was 23.6 cents. For food consumed away from home, it was a paltry 4.4 cents.

As more and more people are one, two or more generations removed from the farm, there is a growing disconnect between farmers and consumers. It’s more important than ever for producers and consumers to talk to each other. Consumers want to know where their food came from, what’s in it, and how it was treated. And I don’t know of anybody with a more vested interested in taking care of the land than the farmer.

Reasons for optimism

Despite the challenges, producers remain optimistic. A recent survey shows that most believe commodity prices will increase next year, and good times will return in the next five years.

A significant percentage of producers are still making a profit – albeit at much thinner margins. These producers often “sweat the small stuff” by paying attention to details, managing operating costs and being disciplined in their spending. They also have strong grain marketing skills and a solid business IQ.

There is an overwhelming consensus that long-term tail winds are still firmly in place for agriculture. A recent article noted that by 2027, the world will be experiencing a 214 trillion calorie deficit. This is much earlier than some global leaders have been forecasting. The article indicates that the demand for calories will exceed traditional food-producing regions’ abilities to expand. How much is 214 trillion calories? About 379 billion Big Macs.

It will take a 50 percent increase in food supply to meet the growing global demand by 2050 with an expected additional 3 billion mouths to feed, along with the rising middle class in many countries. There is no doubt farmers, and continued technological advancements, will be needed to feed the growing global population. It’s interesting to note that since 1990, 56 percent of the increase in world corn production has been due to higher yields. Only 44 percent is due to additional corn acres.

Navigating the short-term headwinds and possibly making some hard financial decisions to be in a position to take advantage of long-term tailwinds will be key.

Lynn Paulson
Lynn Paulson
SVP/Director of Agribusiness Development
Main: 701-298-1500
Direct: 701-298-7138
lpaulson@bellbanks.com

Lynn Paulson is senior vice president and director of agribusiness development for Bell Bank. He writes and speaks about agricultural lending and finance, the global economy and the ag economy.  Lynn has expert knowledge of the ag industry, having worked in ag lending for more than 30 years and as the owner and recently retired operator of a Benson County, N.D., family farm.