Tight Budgets
By Brent Gloy and David Widmar,
Agricultural Economic Insights, LLCi
(www.ageconomists.com )
Tight Budgets Likely to Persist in 2017 Now since the 2016 crop is harvested, attention is shifting to the 2017 growing season. We produce a series of crop budgets for the major row crops and major growing regions of the country. Our initial look suggests that 2017 will be another challenging year for row crop producers.
While there has been a significant amount of negative news about the 2016 economic situation, there were some positives. Perhaps the biggest positive is the decline in the cost of production. This year saw reductions in fertilizer and fuel prices, as well as cash rents. Unfortunately, crop prices have continued to decline and additional cost reductions will likely be necessary to restore profitability in 2017.
Large Crops Create Low Prices
In terms of crop yields, 2016 is the third consecutive year that U.S. producers have harvested very large corn, soybean, and wheat crops. This has put tremendous downward pressure on crop prices. The best illustration of this is the wheat market where producers throughout the Great Plains were seeing cash prices well below $3.00 per bushel.
Low Crop Prices Strain Budgets
Low crop prices have put farmer profit margins into negative territory. In many areas of the country, output prices are well below the total economic costs of production. In most cases, output prices are not sufficient to cover variable costs (such as seed, fertilizer, and fuel) and land rents, let alone machinery costs and unpaid operator labor. This means there will continue to be pressure for costs to adjust downward. This is particularly true for wheat production in the Great Plains.
Too Many Acres
One of the biggest causes of the economic downturn is that farmers worldwide greatly expanded acreage during the farm boom. This can be seen in the graph, which shows world principle crop acres from 1960-2016. There are a few important things to note about this graph. First, when acres come into production, they rarely leave. You can see the large increase of the 1970’s and early 1980’s, which were brought on by a previous agricultural boom. When incomes fell in the 1980’s, acreage did not contract back to pre-boom levels. Instead, they stayed relatively flat until the next boom in the mid-2000’s.
So What About Today?
Combining large U.S. crops and an increase in global acres, the conversation has switched from “too little production” to “burdensome levels of global grain inventories.” Furthermore, it’s important to note that below average yields – as traders feared in June of this year –are not enough to create a multiple year surge in commodity prices and farmer income. Such a situation would require a demand-driven shock.
All the additional acreage means it is critically important that we cultivate strong demand for agricultural commodities in everything from biofuels to livestock, to emerging markets, to alternative bio products. This will be particularly important because government program payments will start to decline quickly in coming years.
So What Adjusts?
The negative margins being experienced in farm country will put pressure on all costs. This means that land rents, land values, and capital investment in agriculture will continue to face downward pressure. To date, the largest adjustments have come from changes in cash rent and fertilizer prices. Looking ahead, pressure on other inputs, and particular, land values and cash rents, that farmers carefully manage their costs or production and their financial situation in the coming years.
What To Learn More?
Interested in learning more about these and other trends in agricultural economics? Read our weekly articles, which can be found at www.ageconomists.com.
