Following some of the best years ever for growing row crops, an agricultural economist advised farmers to prepare for several years of lower prices, at a workshop at the American Farm Bureau Federation’s 95th Annual Convention.
“The last six years have been extraordinary years if you are a row crop producer,” said Matthew Roberts, an associate professor at Ohio State University’s Department of Agricultural, Environmental and Development Economics. “It's been the best six years in history. The next six years will not be like that.”
Strong demand from China and the ethanol industry altered corn and soybean production globally during agriculture’s recent boom period. A decent U.S. crop year in 2013 and curbed growth from ethanol may mean some acreage will revert back to pasture and forage crops.
“The question is how fast. After a grower has made an investment into row crops, we’ll likely have to see losses before that land reverts to another use,” Roberts said.
Roberts advised large, aggressive and young growers to prepare for a bumpy ride by putting cash in the bank.
“We are entering a four-year to five-year period of lower costs and profitability. I think we’ll see some farms (that expanded aggressively) in the corn belt go bankrupt,” he predicted. “Put one year’s worth of land charges (above normal working capital needs) in the bank as soon as possible,” he said.
“Cash is the only way to ultimately manage risk”, Roberts added.
“We have a generation of young farmers who have never experienced hard times,” he said.
Roberts urged farmers to get their spouses fully on board with the farm's financial outlook.
“Don't compound financial problems with divorce,” he said.
“We are living in the most prosperous time in history,” Roberts suggested by pointing out that the world poverty rate has dropped significantly over the past 40 years.
In 1970, nearly a quarter of the world's population lived on a dollar a day or less. That number fell to 5 percent in 2007. People who live better, eat better. Improving economic conditions in the developing world have caused demand for U.S. agricultural commodities to surge.
From 2001 to 2011, China's demand for soybeans grew by 30 million acres. Over roughly the same time period, U.S. ethanol usage increased by 20 million acres.
“Fifty million more acres were needed just to meet the top two demands,” he said. “High prices give incentives to change behavior. As a result, global corn, soybean and wheat production have all increased substantially.”
However, ethanol's demand for corn has flatlined. Roberts said 2013 saw the first decent corn yields in four years and that means lower prices. He thinks more corn will be added back into feed rations, and exports will increase.
Domestic demand is flat for soybeans, but exports are very strong, from China, Africa and the rest of the developing world.
As for wheat, he said the United States has been using more than it produced lately, which has positively ate away at wheat stocks.
The U.S. cotton sector is expected to grow according to Sharon Johnson, senior cotton specialist for KCG Futures in Atlanta. Cotton supplies are at a 29-year low. Worldwide, Johnson predicted 2014 cotton production will mirror consumption.
China, a major player in the cotton market, is rebuilding its state reserves to control prices. The U.S. supply will expand requiring prices to be more competitive to secure exports, especially if Chinese imports shrink.