For almost 10 years now, agriculture has enjoyed a Golden Age! With the exception of segments of the livestock industry, most of production agriculture experienced record commodity prices leading to record profits. The main fundamental change that took place to create this dynamic market was a shift from a supply-side economy to one fueled by increasing demand and several short crop years.
Now that our industry has stepped up to meet the new demand, there is another fundamental shift underway as the markets adjust to increasing worldwide supply of grain that is pressuring prices. This change has been good for livestock producers who are now mostly profitable due in part to falling feed costs. Production agriculture, on the other hand, is now adjusting to thin or even no margin of profit.
Part of the pressure on profits is due to steady input costs. Fertilizer, seed, and herbicide prices have remained relatively flat since last crop year. Another key input cost is cash rent, which only declined 10 to 15 percent in 2015 due to continued strong rental demand from local farm operators.
What is the New Normal? History indicates that when prices adjust up or down in agriculture, they often over adjust. Is a grain price plateau or floor in place at approximately $4 corn, $9 soybeans, and $5 wheat? Or are those prices now more of a ceiling? A good case can be made for both sides of this discussion!
Regardless of the outcome of the plateau/ceiling discussion, there will likely be more financial stress on farm operators as profit margins compress at all levels.
The commodity market volatility we have experienced since 2006 often rewarded those with no commodity marketing plan instead of the well disciplined manager. As a result, as of mid June, farm operators were holding a significant percentage of last year's crop in on-farm storage hoping for a rally as prices continued to drop.
A short rally did come in mid July allowing for some additional sales. The new normal, at least for this year and likely next, is that good management will be rewarded. It is likely only the farm operators who are astute managers with disciplined marketing plans in place and well managed expense budgets will be profitable.
Many older farm operators have been postponing retirement because it has been fun to farm recently. This may change as margins tighten and older operators start to let rented ground go back to the landowner.
For the first time since the 1970s, younger people have been returning to the farm in large numbers. For them, the new normal is the profitable time period we just went through. They will need to adjust to declining profits and the need to curtail and control cost-of-living expenses, which have increased exponentially on the farm in this bull market.
So, is this the new normal or the top of the slide to something lower? In my opinion, all is not bad news in agriculture. We are just going through an expected adjustment period. There will still be profit in production agriculture and, of course, livestock is doing very well. Land values have held fairly steady to slightly softer so far this year depending on location and quality with top land still selling well in most areas.
We have a new farm program that will produce a payment this fall that will bolster incomes. Also, crop insurance floor prices were quite good in March, above current pricing, giving a revenue protection to all who participated in the crop insurance program. This will have a stabilizing effect on the market.
This is an adjustment period and, at least for the next couple of years, production agriculture will have to get used to a more modest level of profit. Input costs will eventually adjust down to something that fits the current low grain price environment allowing for a profitable and growing agriculture into the future.
Landowners will likely see some pressure on cash rents as farm operators start to renegotiate for next crop year. We anticipate some banker pressure on farm operators to lower cash rents paid to landowners while holding the line on expenses. Some operators will not get financed and will not be able to pay their rent next spring.
For others, the temptation will be to cut back on fertilizer on rented ground to reduce costs and improve profits short term. As always, diligent management and working from a position of knowledge gives landowners their best tools to work through this market correction and continue to have a fair lease and profitable farm operation.