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Is Our Prosperity Fragile?

March 9, 2013
By: Charlene Finck, Farm Journal Editor
Ready For The Ride 410
  
 
 

Today’s good times in farm country might not last, so now is the time to plan for the unexpected

Agriculture is on a roll—and has been for a decade—but don’t be lulled into thinking this is business as usual.

"These are not normal times," says Michael Boehlje, Purdue University economist. "Don’t think that today and the strength of this industry is forever. [At the same time,] don’t automatically think it is going to tank, but don’t forget that it can."

Boehlje’s remarks comes on the tail of USDA–Economic Research Service (ERS) report that estimates that the 2013 farm income will be the second highest in U.S. history. While much of that income was made from crop insurance payments, the year is second only to 1973 when adjusted for inflation.

Agriculture’s greatest vulnerability to fragility is a land price adjustment, something he says is sure to come. The sky-high land prices this winter have him nervous. Prime farm ground bringing up to $20,000 acre is living proof that there’s a land boom, and that land, he says, is valued at more than twice its earning potential.

"It’s not a question of whether we’re in a land boom. It’s a matter of what will be on the other side—a bust or a soft landing," Boehlje says. "We could have a soft landing if we stop right now with the climb in land values."

Two keys to a soft landing are continued strong exports and keeping the mandate for ethanol in place.

One short crop. None of that changes the fact that land, on average, is 85% of the asset base in agriculture. That lopsided net worth makes farmers more fragile than they were in the 1980s.

"We are in unusual times with a lot of volatility," he says. "I don’t want farmers to be road kill."

Boehlje points to farm equity data from USDA-ERS that shows how just one year of $3 corn in 2009 plummeted the national average net worths of farmers. A return to $3 or $4 corn could quickly create financial woes.

Boehlje shares a lineup of factors that make us vulnerable and tips to capitalize on ensuring uncertainty (see below). In addition, he admonishes producers to do a "fragility test" on their own operation—to know where they stand. Being bigger, more specialized and more highly leveraged all
increase fragility.

Don’t Get Caught by Surprise

Vulnerabilities to Continued Prosperity

  • Land price adjustment
  • Increased supplies from productivity or acreage increases
  • Slowdown in demand growth
  • Higher interest rates
  • Margin compression
  • Asset value declines
  • Weak working capital positions
  • Excess or poorly structured debt
  • Availability of credit
  • Increased tax burdens


Even though times have been good for agriculture, risks remain. Of all the factors Purdue University economist Michael Boehlje is concerned about, the risk of a land price adjustment tops the list. Too much of farmers’ net wealth and asset base is tied up in land that is overvalued in today’s land boom.

Tips to Capture the Opportunity in Uncertainty

  • Do not plan for the averages. Instead, position for the tails.
  • Recognize that increased volatility mandates more focus on risk and management.
  • Minimize your wrong choices.
  • Guard working capital.
  • Make sure you’re in a debt situation that will allow you to capitalize on the fragility of the industry—and your competitors.
  • Be careful about how much you bid for "blue sky" in land deals.


Recognizing that many farmers are entrepreneurs and that entrepreneurs thrive during uncertainty, Boehlje offers these ideas for being ready to take advantage of business opportunities when things turn south for agriculture.

You can e-mail Charlene Finck at cfinck@farmjournal.com.

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FEATURED IN: Farm Journal - March 2013

 
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