Know the danger areas for 2013 and reduce your risk
Who could have predicted a year like 2012? One of the worst droughts in history parched nearly the entire country, yet farmers, in general, will be better off financially than they were in previous years.
USDA estimates that net farm income, which includes total returns after expenses, will exceed $122 billion in 2012, up 3.7% from 2011. High grain prices and crop insurance indemnity payments are reported to be behind the dramatic increase in profit.
But as easily as profits go up, they can come down. "Right now, the market is really nervous," says Bob Utterback, Farm Journal Economist. He adds that the drought has left the U.S. with short supplies, uncertain demand sources and volatile grain prices. Macro market elements such as the slow economic recovery and low consumer confidence are also at play.
Some would say that black swans are on the horizon. But while many of the potential economic dangers are easy to identify, they are hard to prepare for. A number of the reasons farmers have been profitable in the past few years—high crop prices, low interest rates and a competitive farmland market—can easily be reversed.
Danger #1: Economy stays tepid.
Agriculture has been a bright spot, while the overall economy has been wavering. Kevin Kliesen, business economist at the Federal Reserve Bank of St. Louis, says the economy has continued to improve, but the gains have been lackluster and uneven.
He says unemployment is going down, but consumers have been cautious with their money. Additionally, higher oil prices, policy uncertainty and the legacy of the financial crisis are still contributing to the slow economic recovery. "It’s going to take a while for things to unwind," he predicts.
Overall, Kliesen says, the stagnant economy is killing confidence, but he expects it will eventually turn around. "The economy wants to return to its normal rate of growth. If European and U.S. policymakers get their act together and we lose some of the uncer
tainty, the economy could take off."
Danger #2: Crop prices fall.
Prices peaked at all-time highs this summer, with corn surpassing $8 and soybeans topping $16. They have since settled lower but are still at impressive levels.
What could make prices drop? A huge crop next year. Top Producer columnist Jerry Gulke says this year’s high prices will likely attract a large number of acres, especially corn, next year. "Corn prices were extremely high at harvest time. Farmers made money even if they didn’t have crop insurance. You can multiply $7 by just 100 bu. and you should still have made money," he says.
Additionally, farmers were likely not totally shaken by this year’s challenging growing year. Gulke, who farms himself, says he now knows his worst-case scenario for corn yields.
- December 2012