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Ag sector has best years ever

Jan. 15, 2014 | 0 comments

MADISON

The last three years have been the best for U.S. agriculture — ever — in terms of gross farm income.

Bob Young, chief economist and deputy director of public policy for the American Farm Bureau Federation shared that with a group of 500 lenders from the Wisconsin Bankers Association last week in Madison.

Certainly some individual producers have not fared well in the recent past, he said, as high grain prices prevailed. That impact was felt by livestock and dairy producers who needed to buy grain.

But as a whole, the agricultural sector has had farm income well above the $60 billion that became the norm each year for the last several decades.

The ethanol industry is "either the absolute worst thing we could have done or it's absolutely the best thing we could have done," he said. It is largely responsible for the high grain prices that have lifted farm income over the past four years.

"It's a thing we did — let's get over it."

That industry created an additional demand for corn that has raised prices substantially and farmers brought additional acres into production or converted land from production of other crops to corn.

In the soybean market, China has been a driver, with one of every three bushels of soybeans produced going to that market. These large users of corn and soybeans in the market mean that if demand backs off just a tick or two, prices are easily impacted.

Young reminded the bankers that in 1974-75 there were high farm incomes in the United States but there was an extremely different picture when it came to inflation and interest rates.

An inflation rate of 12-15 percent was not unusual and interest rates were jacked up substantially.

Young told the bankers that agriculture is a capital-intensive industry. "We borrow a lot of money," and that interest rate hikes affect farmers' bottom line.

In the 1980s, prevailing policies involved the government holding large stocks of grain. As farmers placed corn or wheat under loan, the government held stockpiles of these feed grains. Dairy products like non-fat dry milk and cheese were held in government storage too.

Today there are no grain reserves, Young noted, which contributes to the volatility caused by weather events like the 2012 drought. He compared the corn price run in the most recent drought year to that of 1988.

Back then "the government just opened the bin doors and put that grain on the market," he said, referring to the reserves. Even with the 1988 drought, corn prices only went up by 25 cents.

More land

Another condition that exists in today's grain market, he said, is that South America has steadily been adding to its crop production acreage and placing more grain on the world market.

According to Young, the South American grain belt has gone from 110 million acres to 175 million acres. There is also more land in a lot of other places, including the Black Sea region and Ukraine from the former Soviet Union that has been placed into production of grain.

"What's the cure for high prices — high prices. Low prices must persist long enough for them to decide they want to take their land out of production."

All these conditions create volatility that was never seen during the era of government purchases of grain.

Young believes that next year's corn price will average about $4 per bushel, with soybeans hanging in about $11 and wheat at $7.

In the dairy sector, Young noted that the national cow inventory came down a bit toward the end of last year and feed prices are also coming down for dairy producers.

The market complex includes non-fat dry milk that is setting price records and butter consumption that is increasing as consumers begin to believe research findings that some of the fats in alternative products might not be as healthy as they thought, he said.

"The dairy sector is not doing too bad for itself."

Young believes beef prices will remain very high in 2014 given the fact that there are fewer beef cows in the United States now than there were in the 1950s. He expects prices for beef over the next two years to stay very strong.

Debt structure

Through the economic crisis that beset the U.S. and the global economies several years ago, farmers in general were able to maintain a good debt-to-asset ratio. That measurement of financial health is, in general, "as good as it's ever been," he said, "although for individual producers it could be a very different picture."

Young said he expects that U.S. farm income will work its way back down from the current heights to the $80-billion range as corn prices moderate.

Even with farm income a little lower the sector is in very good financial health, he said. "I wouldn't be afraid to lend to this sector."

Talking with reporters after his speech to the bankers, Young said one of the questions that must be looked at with individual producers is whether or not they need $7 corn to pencil out their profits.

He said that while land prices and rents are high now, if grain prices stay low it will take a while for landlords to come down in those prices. Surprisingly, as farmers bought more land at increasingly higher prices, the sector didn't see a huge run-up in land debt, he said.

Stories have circulated about cash sales of land with little financing needed, he added.

As Congress continues to dither on the farm bill Young said the dairy program is causing a lot of disagreement.

Farm bill

House Speaker John Boehner is opposed to the program proposal that includes a supply management component while Rep. Collin Peterson, the Minnesota Democrat who wrote the Dairy Security Act on which the dairy title is based, believes it is an essential part of the program.

Young told the bankers there is also disagreement on how much the government's food stamp programs should be cut and lawmakers have not reached a compromise on that.

House members want a cut of $40 billion in food programs while the Senate bill includes $4 billion in cuts. While Senators agreed to raise their cuts to $9 billion Young isn't sure that's enough to get the measure through the Senate.

"It's probably not a big enough number to get it out of the House unless some Democrats vote for it."

He's still hopeful they're going to get it done but every day or week that goes by diminishes that hope.

At some point the so-called permanent law is going to have to be accounted for — with its milk price set at $52 a hundredweight.

Young expects Congress to pass a measure that will suspend that 1949 Act until they can get a new farm bill passed.

People in dairy markets are already getting concerned, he said, since the country is now in the time frame in which it should be operating under the permanent law. It's just that the U.S. Department of Agriculture hasn't promulgated rules to operate under it.

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