Balancing farm cycles takes skilled management

2017-03-18T09:00:00Z Balancing farm cycles takes skilled managementBy Bill Tiedje, Illiinois Farmer Today Illinois Farmer Today

SAN ANTONIO, Texas — Watching inflation, enhancing productivity and managing costs — to survive now and to prepare for future expansion — are among the challenges farmers face as they navigate the latest commodity cycle downturn.

Jason Henderson, director of Purdue Extension and former vice president of the Federal Reserve Bank of Kansas City, told a packed hall of farmers at Commodity Classic March 2 they can look to three downturns since 1900 to judge current conditions.

He spoke during a panel discussion sponsored by the Purdue University Center for Commercial Agriculture.

“I think in many different ways what we are experiencing today is very similar to past cycles,” Henderson said. “I think the future is bright for agriculture, you just got to get through the swamp. How do you survive and, at the same time, position yourself for a bright future?”

The cycle

Ag downturns typically have two components: a liquidity crisis (a cash crunch, often currency related) and a solvency crisis (bankruptcy), Henderson said.

“I characterize the past three downturns after World War I, World War II and the Russian Grain Deal as the good, the bad and the ugly,” he said.

The three commodity cycle downturns, according to Henderson, are:

  • In the 1950s, valued-added agriculture declined from highs, but farm incomes settled back near historical highs.
  • In the 1980s, value-added ag once again declined, and the share of income going back to farmers (after high-interest debt losses) also declined.

“What’s the basic lesson from the 1980s? Don’t leverage the farm,” Henderson said.

  • In the early 1930s, farm incomes fell to record lows, but so did the value ag contributed to the economy.

“It wasn’t just that farmers didn’t have any money, nobody had any money,” he said.

Henderson said, more than the financial crisis, he credits the freeze of ag trade with starting the Great Depression.

“For me, what really triggered the Great Depression was the 1930s Smoot-Hawley tariffs that spiked a trade war,” he said.

Henderson did not offer a prediction of the future of ag trade, but he said it would be important to follow how policy plays out going forward and to understand how “we are going to engage global consumers and make sure they buy U.S. products.”

Next, he said farmers should be on the lookout for the signs of inflation.

“Inflation is too much money chasing too few goods,” Henderson said.

To achieve growth while managing inflation will require either increases in the U.S. workforce or productivity gains, he said.

“Which type of technology is going to enhance your productivity? That is, for me, the No. 1 challenge, yet opportunity for us to grow our economy and raise our standard of living,” Henderson said.

Conditions update

James Mintert, a professor of ag economics at Purdue University, said production costs are coming down and prices seem to have stabilized.

“Our challenge as an industry is to become more efficient and reduce our production costs over these next several years and gradually get down to the point where we can start making money — or at least break even — at these kind of price levels,” Mintert said.

Seed prices have increased since 2007, along with the use of new seed technology, he said. Crop protection costs have been steady but are predicted to increase in 2017. Cash rental prices have come down somewhat.

Producer sentiment, shown by the Purdue/CME Group Ag Economy Barometer, a monthly survey of 400 U.S. agricultural producers with annual gross farm incomes exceeding $500,000, increased to record highs post-harvest last fall, according to David Widmar, senior research associate with the center for commercial agriculture at Purdue University.

The latest Purdue/CME Group Ag Economy Barometer, released March 7, showed a decline in producer sentiment regarding current conditions, but expectations of future conditions remain elevated from year-ago levels.

Earl Collier of Allegan, Mich., said the current commodity cycle “hurts.”

Collier, who has over 20 years of attendance at the Commodity Classic said, “’74 was more exciting.”

Dan and Kelly Snipes, who raise corn, soybeans and wheat near Rochester, Ind., attended the Commodity Classic to hear about what’s new.

“I think we’re starting to crawl out of the trenches,” Dan said. The Snipes said their area hasn’t seen a lot of stress yet.

“We own our own land,” Kelly said. Prices have been near their breakevens the last couple years, she said.

“Haven’t seen many land sales yet,” Dan said.

Planning for the future

Mintert cautioned that many operators are seeing a drawdown in working capital, including grain stocks, since 2013. Restructuring debt to limit obligations before conditions worsen is a good idea, panelists said.

The panel also encouraged farmers to also think about upside scenarios. Mintert said producers need to know their own costs of production and compare them with others in the industry.

As conditions improve in one to three years, expansion and other new opportunities should be on producers’ minds as well, Mintert said.

While farm expansions have been typically viewed as coming through opportunities to rent or purchase more land, he encouraged farmers to also think about a “merger or acquisition” type approach, working with other farmers in the community who may seek to exit due to family or financial reasons.

Now is also a time to think about changing enterprises, such as changing crop rotations or raising organics. Widmar said the costs of transition should be considered with any new enterprise.

Mintert said the big “takeaway” was to ensure each farm operation has the “managerial capacity to capture opportunities that are out there.”

“Sort through the noise,” he said. “Not every technology or every product is going to be a success for you.”

Copyright 2017 Illinois Farmer Today. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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