Paradigm shift requires planning and flexibility
Producers are beginning a transition—one of rising supplies, tighter margins and growing competition. But far from reliving the 1980s, farm operations in 2014 and beyond will be shaped by unique opportunities and challenges.
"The balance sheet of agriculture is better prepared for volatility," says Terry Barr, senior director of industry research for CoBank.
While it’s true that 2008 to 2013 proved strikingly similar to the booming 1970s, key factors make today’s environment different. Assets increased in value by 41% during the recent period, while debt grew only 19%.
Equally important are stock levels for corn, which while building, are not yet burdensome. "One good harvest will not remove volatility," explains Barr, who spoke during the 2014 Top Producer Seminar. "A recovery in global grain stocks will require two years of large harvests."
Barr expects corn to range from $4.10 to $4.70 per bushel, soybeans from $11.75 to $13.25 and wheat from $6.60 to $7. He foresees more price pressure for grains and oilseeds in 2015, assuming trend yields.
These shifting prices will cut corn planting to 92 million acres in 2014, Barr says. Soybeans will increase to 82 million acres, with only modest increases for wheat and cotton.
"I’m not so concerned about 2014; I’m worried about 2015," says Mike Boehlje, ag economist at Purdue University. Producers need to prepare themselves not so much for any given price outlook but rather for uncertainty, he says.
Boehlje suggests producers project what they think their costs will be based on production and inputs, as well as costs on both the lower and higher ends of that in case things go differently from what’s anticipated. Equally important is to protect working capital that gives flexibility.
Barr advises incorporating global grain inventory into business plans. "We have to find demand," he says. Two sources of growth are possible. One is an increase in domestic feed use as the meat sector expands and the U.S. economy gains steam. The other is exports.
No Promises. Neither category is a guarantee. Feed demand is challenged by the U.S. cattle inventory, which is at its lowest level since 1951. Export demand is challenged by new competitors, which have increased grain production 20% since 2007, compared with domestic growth of 5%.
On top of that, exports might be affected by capital flows from developing economies as interest and exchange rates shift. The value of the U.S. dollar is poised for a rebound, adding more uncertainty.
The good news is that Barr foresees growth in the U.S. and international economies. But both face crucial policy issues, including stubbornly high U.S. unemployment and how central banks will unwind up to $7 trillion in debt.
The spread between assets and debt was greater at the end of 2013 than in the boom times of the 1970s, giving producers more flexibility to ease into a period of projected lower returns. Source: CoBank
Issues of cost will also be at play as higher interest rates set in, although probably not before mid-2015. "Debt capital over the next three to five years will become more expensive and subject to tightening credit standards," Barr predicts.
Other trends will also shape agriculture. "The regulatory and market demands for more scrutiny of food chains will expand and impact domestic and global supply chains," Barr says. "Food safety, animal welfare, traceability, sustainability and environmental regulations will increase on a global basis."
- April 2014