Doing nothing is not a strategy
By Ken Root
Since 2006, farmers have seen crop prices rise. The yearly charts often moved upward through the growing season and were well above the cost of production when harvest came. Farmers that contracted ahead, in the early years of this boom cycle, were denied the highest prices because of their commitment to take a price that looked good when the contract was written but was below the market value when delivered. On the other hand, those farmers who did nothing were rewarded by the marketplace as each year’s supply and demand caused a price uptrend that allowed them to make no marketing decision until it was time to sell. There should be little justification for that strategy and certainly no bragging rights. Now we have refilled the bins with a large corn crop and the price has tumbled. I hope the years of prosperity haven’t dulled the pencils of business oriented farmers who plan ahead.
Even the livestock sector is not immune from being lulled to sleep by rising prices. I would say it is more challenging to be profitable in meat production than in grains. The cattle industry is now seeing record highs for feeders and animals coming out of the feedlots but they paid a high price for it. The challenge for a livestock grower is to stay in business long enough to enjoy high prices. There have been weather disasters that really took their toll on regions of the country while benefitting others. The droughts of 2011 and 2012 made it almost impossible to keep your herd in the Great Plains states and the blizzard of October took out a lot of cattle in South Dakota. These situations make survival a tough proposition and have the livestock industry pushing hard for an indemnity program that would provide a safety net in the new farm legislation.
We are creatures who are capable of planning ahead. Our ancestors were exceptionally good at developing a plan and moving on it against long odds. Consider your original grandparents who came to this country. That wasn’t just happenstance; it was a dream that became a plan that became a farm, a livelihood and a life. There was “risk and reward” but more, there was “planning and execution.”
I am amused to think that we hit this period of high prices almost exactly 100 years since “parity” was established as agricultural policy in this country. In that century, we saw low prices more than we saw highs. We had an uptrend in the 1940s as the country came out of recession and went onto a wartime footing. We saw the Russian grain deal of the 1970s that ushered in a substantial period of prosperity and we saw a spike in prices in the late 1980s and again in 1996, but those lasted for one year, at best. The current period of strong demand and limited production may be documented by historians as producing the greatest wealth accumulation ever seen in agriculture.
But all good things come to an end. We are down $1.25 per bushel on corn with USDA Risk Management setting $4.39 as the fall price for crop insurance payments on those who have revenue insurance. Soybeans have held at the spring figure of $12.87 with very strong export demand from China. We may find that this year’s large harvests still have value due to the world’s prosperity and desire to provide a better diet for their people.
I’m not a number cruncher and cannot determine the break even cost because every farm enterprise is different. Still, I see that there is a lot less margin for growers in the coming year than in the years we have just completed. The key to getting where you want to go is planning. To succeed in going backward; you only have to try to stay where you are.
There was an additional benefit to the five-year period of prosperity in agriculture. Our high prices for grain allowed many regions to improve their infrastructure to produce more corn and soybeans. That is not a bad thing. South America’s exploitation of their interior is now feeding an additional billion people worldwide. Africa and Asia could do the same and that would account for enough additional food to supply the needs of our projected population of nine billion in 2050. Food is the number one ingredient in peace. Famine is the number one ingredient in social unrest and rebellion. It takes high prices to bring land into production as governments and farmers plan for their future.
I am not seeing anything close to a farm recession because the world is changing. Although the United States, Europe and Japan have faltering economies, there is a wide range of countries that are seeing the best times in living memory. They are active in the free market and are moving, sometimes slowly, toward a more democratic society that rewards work and facilitates greater consumption of high-quality food.
Rather than see the price cycle rise and fall with great amplitude, I think it may level out and begin a long climb to mid-century. That would mean a farmer or livestock producer who planned for 10 years of thin profits would be able to move the enterprise ahead in a controlled fashion with production in line with consumption and risk management in step with real risk associated with their commodity and region. That doesn’t mean planting dryland corn in Colorado nor feeding cattle in Minnesota is going to be the best enterprise just because that’s where you and what you want to do.
To be in business you have to be a capitalist. You can be sympathetic to the needs of your family, employees and members of your community, but the first thing you have to do is keep the enterprise solvent. That is not based on luck; it’s based on planning.
Editor’s note: Ken Root has been an agricultural reporter for 37 years. Root now does daily radio and television programming and is a columnist. He can be reached at email@example.com.