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What Happens Now?

December 13, 2008
By: Sara Schafer, Farm Journal Media Business and Crops Editor
 
 

Mark 2008 as one of the oddest years in U.S. agricultural history. Start with breathtakingly high grain prices that thudded in a resounding crash come fall, mix that with soaring input prices along with a stock market debacle leading to a general economic disaster, and it's easy to see why farmers feel a bit shell-shocked.

As producers get poised for the next crop, farmers all across the country wrestle with cropping decisions and the uncertainty of what lies ahead. Thankfully, experts say most farmers are well-positioned to weather the crisis. Farm debt-to-asset ratios remain low, and bankers consider ag a good risk. That isn't to say some adjustments won't be made, but it seems unlikely that we'll repeat the 1980s farm crisis.

"Farmers have had five years of very strong income. They set records in 2007 and 2008. There will probably be pretty strong income next year. It will just decline a bit,” explains John Moore, Farm Credit Administration chief economist. "Balance sheets are strong. We have seen a significant decline in corn, soybean and wheat prices, but ethanol puts something of a floor under grain prices.”
As inputs fail to track with declining grain markets, Mike Duffy, Iowa State Extension ag economist, recommends farmers revamp their plans by reducing fertilizer usage where possible and by renegotiating land rents.

"Over the years we have tended to overfertilize. Now is the time to be taking some money back out of that soil if fertility is at a high or medium-high level,” Duffy says.

"In Iowa, land leases had to be broken by Sept. 1, but I think it'd be a good time to go back to landlords and renegotiate, especially if there's no way to get a variable rate on the lease. I'd propose a fixed rate so the landlord will know the rate of return, then arrange to go above that rate if prices are better than we think,” he adds.

Markets for farm products could be negatively affected by a global economic downturn, but U.S. farmers should still fare well, says Bob Engel, president and CEO of CoBank, Denver, Colo.
"At the end of the day, demand for the quantity, quality and safety of U.S. agriculture will be there. Two-thirds of the people in the world don't eat well and need to improve diets. This is not going away. I do believe the big picture points to U.S. agriculture going forward in a positive way,” Engel says.

Farmers also take a longer view than Wall Street and nonfarm sectors. "We tend to look in one-year cycles, but farmers think in much longer terms, not just for this year's profit. Many are growing profit for future generations. They realize there are times cash flow will not be positive. They realize that in the longer term the enterprise value of their farms will increase,” Engel says.
It won't be a surprise that lenders may require farmers to provide more information about forward pricing and purchasing inputs, says Mike Boehlje, Purdue University ag economist. Loans for land and capital purchases could be harder to come by, as well.

"This is not because ag lenders have been overly lenient but because regulators are now looking closer at the institutions they're regulating. If input prices remain high, there will be large dollar amounts required to pay for them, so credit institutions may be looking closer at them just because of sheer size,” says Bruce Ahrendsen, University of Arkansas professor of ag economics and agribusiness.



Bruce Miller, Vincennes, Ind.,
knew it was time to pull the trigger on his 2009 planting decisions when he was harvesting this year's corn and soybeans, but he didn't know which trigger to pull.
"I don't have enough information to decide. There are more unknowns than at any time ever in my life. I'm at a period where I have the least confidence in the parameters of next year's crop I've ever had,” he says.

When commodity prices bounced upward after their fall, Miller kept his fingers crossed that the low point was the market bottom.

"I'm hoping that either commodity prices or input stability helps us move forward. We are fortunate that our corn this year came in 15 bu. per acre higher than our guess and soybeans were better, too,” Miller says.

Gregg Nieman, New Home, Texas, plans to stay with cotton, the crop he knows best, next season. The High Plains has few viable options, he says.

"I'm going to soil sample every field and maybe save some fertilizer cost that way and stay on the Roundup Ready Flex program, which saves trips and diesel, if Roundup seed doesn't go sky-high,” Nieman says. "I'm kind of stuck. It's hard to get conventional seed without traits and, with conventional, it's hard to find labor to spot-spray weeds. I only have two guys working with me, and I can take care of more acres with less labor if I use Roundup Ready seed,” he adds.

"I'm not worried about financial credit because I'm in good financial shape. What concerns me is if the recession stays with us long, it could affect the retail market for cotton products.”
While he's reluctant to try alternative crops, some of his neighbors will plan to take the plunge, Nieman says.

"A few neighbors will plant sunflowers. There'll be some wheat/milo rotation. There may be some irrigation circles that are half cotton and half grain. For me, though, I'll stick with cotton. Landlords want cotton. With grain price falling, I don't see how you can make money off grain, with the cost of water,” Nieman says.

As harvest season wound down, Mark Mueller, Waverly, Iowa, still planned an even-acreage split between corn and soybeans next season. "It's possible that by planting time, the market might be saying it wants more corn. If that's the case, I might be two-thirds corn by spring,” he says.

He's concerned about the grain price drop and hopes to see corresponding declines in inputs and land rents.

"I think rents are going to be renegotiated downward. I think land prices needed to take a breather. That suits me fine. It gives me a couple of years to pay debt down,” Mueller says.
"I bought a farm a year ago for $5,500 an acre. Then, this summer I passed on one for $6,400 an acre, and I'm very glad I did not get it. I'm lucky to walk away from that.

"Most of my land is family-owned, so I'm in a pretty good position. I wouldn't be surprised to see guys finding ways to back out of rental agreements. Some might be stuck a year before they can get out,” Mueller says.

Mueller will also concentrate on keeping operating costs at the current $200 per acre on his 2,000-acre farm.

"My banker said some farmers borrowed over $300 per acre this year, so I'm sitting pretty good. If I can keep costs to $250 an acre, I'll be doing OK,” Mueller says.

"I prepaid half of my N [nitrogen] needs for next year. That may turn out to be a mistake because N should be getting cheaper, since oil has come down in price.

"Seed will be higher, but seed prices are also all over the board. There's stuff going for well over $300 a bag, but you can also get stuff from other companies for $200. I do think we're seeing value for seed. Those traits have proven to be worth it,” Mueller says.

It's time for sharp marketers to be sharper than ever, he says. "These volatile days are all marketing opportunities. It used to be that corn price moved a dime a year. Now it can move 30¢ in a day. It's a chance for me to sell,” Mueller says.

"I don't make all the right moves. This summer when corn went above $7, I didn't do anything. I was told prices could be higher. I got greedy. But at least I had the opportunity. That makes me feel better than never having the opportunity,” Mueller says.


David Richesin, Philadelphia, Tenn., produced the best wheat crop in his farming career this year, followed by a dry summer in which corn did surprisingly well on his farm. You won't find much wheat on his place for 2009 harvest, however, and his corn plans are still unsettled.

"Wheat doesn't look attractive. Corn doesn't look attractive. I have some real uncertainty. I typically place my orders for corn and soybean seed by the end of October, but I haven't decided at all what to do,” Richesin says. "Fertilizer cost has gone up more than double unless we have a break in price. The rumor is that they're going to have to soften fertilizer prices. The problem is that suppliers have already bought it.”

If inputs remain high, he'll plant more soybeans next spring. His wheat acreage will be substantially reduced and restricted to his better land.

In the long run, reducing corn acreage may benefit his land. "The land needs to rotate out anyway,” he says. "High input costs have forced me to buy crop revenue insurance. I have three times the money invested now. There's so much more capital at risk per acre. Little mistakes aren't little mistakes any more. The mental stress level is greater,” Richesin says.

Bryan Lundquist, Frederic, Wis., says volatile markets make planning tough for beef producers. Lundquist and his brother, Bruce, own 280 Angus cows on their former dairy farm.

"We have a lot of feed on hand, so we might put more weight on the calves than we usually do,” Lundquist explains. "We usually look at selling 600-lb. calves. We might hold and bring them up to 700 lb. We're hearing that price per pound will be strong on heavier calves.”

The South St. Paul, Minn., stockyard closed this year, forcing the Lundquists to change their marketing plans.

"That was a tremendous facility for us. We got top prices there for our calves. Now we'd like to direct market somewhere. We're going to have to work that out,” Lundquist says.

"We've had a drought here the past three years. A lot of cows and heifers have gone to market, so the number of breedable cattle is way down. We may hold some heifers back,” he says.
The Lundquists run two calf crops, normally selling in both spring and fall. "That way, we split between different markets and balance things out. This year we're trying to plan what to do, but it's hard to decide,” Lundquist says.

Will Roehm, Great Falls, Mont., can sum up his feelings about 2009 in one word: concern.

"We have had a year of higher prices on the wheat side, but we've had a steep decline and there's a lot of worry about what 2009 is going to look like. Input costs are still sky-high,” explains Roehm, who is the president of the Montana Grain Growers Association.

"Fertilizer may be starting to go down, but it's got a long way to go before it gets where it needs to be. A concern I have is that some producers locked in urea at a higher price than they can buy it for now, and the price of wheat has gone down,” Roehm says.

"It's a time to maximize the risk management tools we do have, such as forward pricing and insurance products. Most guys here are concerned but still upbeat. We as an industry have handled adversity in the past and we will in the future. We have risk management tools available and we will use them,” Roehm says.

Glenn Forrester, Columbia, Ala.,
says he intends to stick with his family's long-term plan of producing seed peanuts, sod, cantaloupes and vegetables, with some acreage adjustments.
"I can tell that our sod business is down to 50% of normal activity because of the decline in the housing business in north Florida and along the Gulf Coast. There's now an oversupply of sod. For next year, we'll reduce the sod and go back to peanuts, which is an excellent rotation,” Forrester says.

"I see peanuts holding their value due to nutritional benefits, and I don't think there'll be as much farmer stock of peanuts as we had going into this year. We're coming off one of the best peanut crops ever in southeast Alabama. Plus, peanuts don't require nitrogen like some crops,” Forrester says.

Despite the economy, he remains upbeat about 2009. "I don't own much stock. I'm land poor. When you walk in to borrow money, the lender talks one thing, and that's land. Somebody is going to be farming. We've got to see where our niches are and take advantage of them,” Forrester says.

Chris Crivelli, Dos Palos, Calif.,
worries more about next season's water availability than a farm crisis, thanks to continuing drought and reduced water availability due to a judge's ruling that closed pumps to protect an endangered smelt species.

"We're pretty much counting on not having as much water as we want. We haven't gotten any rain to speak of so far this year,” he says. His family grows corn, alfalfa, wheat and oats for hay and an ever-dwindling acreage of cotton.

"We're fortunate to be in an area where we can grow a lot of good crops. We can grow good cotton, but the market just isn't where we need it to be. Four years ago, we had 750 acres of cotton, and it was the highest-yielding crop we ever had. This year, we had 30 acres. Cotton acreage has been hit hard here the past three years. It's too bad for cotton, but we have to do what's best for us,” Crivelli says.

Kevin Paap, Garden City, Minn., president of the Minnesota Farm Bureau, says finishing up harvest at anticipated tighter margins will be squeezing farmers in his area next year.

"The biggest difference between next year and 2008 is that I think inputs are not going to do much moving, but we don't yet have the opportunity to do forward pricing. Everybody had been expecting $7 corn and almost $15 soybeans, and decisions were made on that. At least the credit situation is good news. The good thing is we've had better farm income the past couple of years, which helped pay down debt. A little liquidity is good in times like these,” Paap says.

Nationwide, it all adds up to perhaps the most perplexing preplanting scenario farmers have faced.

"A long list of things has happened simultaneously and you really can't pull them together. The cost-price squeeze makes it bothersome for many farm operations to make clear repayment statements to lenders. At least the farm program offers some sort of safety net for the major crops,” says Carl Anderson, Texas Extension ag economist.



You can e-mail Charles Johnson at cjohnson@farmjournal.com.

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FEATURED IN: Farm Journal - December 2008

 
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