Like nearly every other grain farmer in the nation, Greg Jochem sold his corn at a profit in 2011, when the yellow kernels were bringing $6 for a bushel that cost just over $4 to grow. The next year was just as good for farmers, with $7 prices, $5 costs and bigger yields meaning more cash.
So the Ainsworth, Nebraska, farmer hesitated last spring when he thought about selling most of his 2014 crop in advance for about $5.
“It looked cheap at the time we did it,” said Jochem (pronounced YOKE-um). “It looks dang good now.”
That’s because corn prices — a bellwether of farm fortunes — are headed toward $3.50 a bushel amid the promise of a bumper crop, here and abroad, with no sign of demand increasing. Corn prices are below the cost of production this year for the first time since 2005.
The price drop has the agriculture industry wondering about the future, and bankers and Main Street businesses wondering if and when they’ll feel a hit.
Agriculture directly generates $11 billion a year in Nebraska and $16 billion in Iowa, the U.S. Bureau of Economic Analysis said. Adding in ag-related businesses such as food processing and equipment manufacturing, the ag production complex makes up more than a fourth of the Nebraska economy, University of Nebraska-Lincoln economists say.
Like most farmers, Jochem figures he’ll make it through 2014 without serious difficulty.
The USDA predicts this year’s farm income will be the fourth highest in history, sharply above 2010 and more than double 2002’s income figure. The Federal Reserve Bank of Kansas City said last week that Corn Belt farmers’ finances are holding steady, even though they’re starting to borrow more money.
“It’s not as doom-and-gloom as it might appear,” said Jim Farrell, CEO of Farmers National Co. of Omaha, the nation’s largest farm management company.
Besides farmers who sold part of their 2014 crop early at prices above today’s market, Farrell pointed out that federal crop insurance, which is subsidized by the government, likely will provide some payments. New programs under the 2014 Farm Act provide a safety net, too.
Demand for grain remains strong, Farrell said, so the current prices might be the bottom of the market, with a “bounce” coming up by next spring.
But the rapid reversal of grain prices and downward predictions are enough to make Nebraska and Iowa farmers think back to 1981, when profits disappeared and 15 straight years of losses triggered the farm crisis that collapsed thousands of farms’ finances.
With revenue from grain sales down, farmers are ramping up their commercial bank loans at the fastest pace since 2007, said Nathan Kauffman, manager of the Omaha branch of the Federal Reserve Bank of Kansas City, Missouri. Delinquency rates are holding steady, but repayments are slower.
“I don’t think it’s dawned on everybody yet how serious this is going to be,” said Dennis Bauer of the University of Nebraska-Lincoln extension office in Ainsworth. “It’s going to be far-reaching, not only the producers but the equipment dealers, car dealers, everybody.
“It’s a train wreck ready to happen.”
Hold on, you say?
It’s true that corn and soybean farmers have enjoyed, on average, eight straight years of profits, including record income for American farmers in 2012, with 2011 and 2013 close behind. And it’s true that many farmers have paid down debt, upgraded equipment, watched their land values skyrocket and, in many cases, bought more land.
But agriculture is cyclical, and many experts believe the cycle is headed down. The Agriculture Department predicts that corn prices will average $3.65 next year, bottom out at $3.30 in 2016 and stay below $4 a bushel until 2023. Soybeans, the Midlands’ second-largest crop, will follow suit.
During that time, the cost of energy, fertilizer, seed, equipment, labor and the other basic supplies of farming likely will continue rising.
Costs up, price down or stagnant — it’s a formula for losses. And what of interest rates on loans, the lifeblood of many farms? That, too, may rise in coming years.
Altogether, it’s what observers call “challenging.”
Jochem, for example, probably won’t have a chance to lock in a higher price in 2015 to offset a drop in prices.
“We’re predicting a lot more pressure on profit margins than we have had in a long time,” said University of Nebraska-Lincoln economist Brad Luebben.
The financial pressures won’t be uniform, said Patrick Westhoff, director of the Food and Agricultural Policy Research Institute at the University of Missouri. “If you’re renting, you’re going to be facing a pretty severe challenge. If you own most of your land, you still might be above water.”
As for the future, he said, “it depends on whether it’s a one-year problem or a multiyear problem. A lot of folks made a lot of money from 2008 to 2012. Folks that put some aside are in a lot better shape than those who leveraged what they brought in.”
Prices may be higher a year from now, Westhoff said. “But if we have back-to-back big crops, this year might seem good compared to next year. The world’s going to have a lot more grain and oilseed than it knows what to do with in the very short term. It could cause lots of disruption.”
One potential saving grace for farmers: Livestock, although that picture, too, is cloudy.
With feed prices down and pasturelands recovering from the 2012 drought, raising cattle and hogs could be profitable this year, a turnaround from the recent past. But there’s a shortage of cattle to be fed for market, which is driving up their price and squeezing potential profits.
Grain farmers face tough decisions on when to sell their grain.
Ron Seymour of Hastings, a UNL extension educator, said holding on to corn is part of an appropriate marketing strategy.
“What we try to tell them is to sell some of the crop for the future, keep some in the bin and sell some when you harvest, so that you’re kind of spreading the risk,” Seymour said. The strategy this year may mean less money, he said, “but that crop is already paid for” and selling even at today’s price will mean cash in hand.
Some marketing strategies reduce risk but offer less potential profit. Other strategies — including “going naked” by not locking in prices early — carry high risks but higher potential profit. Just storing grain in a bin and waiting for spring prices is “a high-risk, high-reward scenario,” UNL economist Cory Walters said.
Despite such dilemmas, Michael Kreycik, president of West Plains Bank in Ainsworth, said his farm customers can absorb a few years of low prices and even losses.
“Our loan portfolio is standing pretty tall, actually,” Kreycik said. “Any land loans, we made sure we have good equity in them,” usually 30 percent or 40 percent on land purchases. “But $3 corn isn’t going to work very well.”
Kreycik started in banking in 1980, when the farm crisis was just around the corner and farmers were borrowing money at 18 percent interest. “I think our loan customers are in a better position now than they were in 1980 to absorb a higher rate of interest and softening of land prices.”
If interest rates rise, he said, “that’s going to start creating some issues,” especially for farmers with larger loans. “We’ve got a few people we’ve helped with a little more leverage than we would’ve liked. They’re going to need higher corn prices to offset that.”
Today’s corn prices are the equivalent of 1980’s $1.80 per bushel, adjusted for inflation, and that’s bad for states that depend on big-time agriculture, said Dale Wiehoff, vice president of the Institute for Agriculture and Trade Policy in Minneapolis.
“We have to think in terms not just in the immediate sense but what is the future for the rural economies,” he said. “When you reach a point of low commodity prices and high land values and a jump in interest rates, that’s what triggered the 1970s and 1980s and the removal of 7 million American farmers from the land over a 20-year period.
“I’m not predicting this. I’m just saying we have to be cautious in a period like this and think about ways to mitigate these factors.”
The volatility of corn prices is the crux of the matter, he said. “That can go from $7- or $8-a-bushel corn to $3.65 in a few years. It’s just really hard to run a business that way.”
Nonfarming investors, including hedge funds and pension plans, have been buying some farmland and may not realize that profits can disappear, he said. It’s hard for young farmers to start in the business when land prices are high, yet a collapse of land values would be worse because much of the land is mortgaged to lenders such as local banks.
“It’s not only the bankers who worry about this bubble collapsing,” Wiehoff said. “This could affect a lot of farmers whose loans and business plans have all been built around high-priced land.”
Low corn prices help some businesses, such as Green Plains Inc., of Omaha, operator of 12 ethanol plants in the Midwest. The company’s spending on corn, its basic material for making ethanol, is down 32 percent from a year ago, helping to boost its profits five-fold.
But CEO Todd Becker said that if prices are below the cost of producing corn, before long farmers won’t plant it. To keep corn production strong, he said, “a new source of demand has to show up. I don’t know what it is, other than ethanol.”
“People mistakenly thought the price of corn would go up forever,” Becker said. “No, when it all lines up between the perfect weather and the technology and plenty of commodities, the longer-term bias can only be lower.”
If farmers cut back on planting corn and soybeans, Margaret Krome suggests they consider alternative crops such as alfalfa, rapeseed, old wheat varieties, vegetables or canola, depending on what their land will produce.
“There are other ways you can go when you’re facing uncertain prices, to get past just corn and beans,” said Krome, policy program director for the Michael Fields Agricultural Institute in East Troy, Wisconsin. “It is a cultural change, but it is also the wisdom of the ages. It’s one of the ways farmers survive when the market is telling you, don’t put all of your land in one crop.”
But farmers in Nebraska and Iowa are likely to continue with their main grains, putting the 2014 Farm Act’s safety net to the test, said UNL economist Luebben.
He expects “substantial” payments under the new law to grain farmers this year and, if price predictions come true, in 2015. He estimated that payments will begin if average prices this year end up at $4.54 per bushel or less, and other payments would begin at $3.70. Soybeans and wheat likely won’t bring payments, but sorghum growers already are qualifying for payments, and rice and peanuts apparently will qualify, too, he said.
“Some things will kick in that we haven’t seen for some time,” Luebben said.
He said the federal payments aren’t designed to protect profits but only to offset some costs, helping farmers come closer to breaking even. “It protects them from the shock of increasing prices. ... It just helps them adjust.”
Ferd Hoefner, policy director for the National Sustainable Agriculture Coalition, said today’s prices mean taxpayer spending from the Farm Act will be higher than expected because the law was based on recent high grain prices, ignoring the cyclical nature of agriculture. The Washington, D.C., group favors limits on payments to large farms.
For example, the final version of the law, enacted in February, set a $125,000 limit on payments to individuals, instead of the $50,000 limit in the earlier versions, he said.
“I think things have been good enough that they can ride through one year without significant problems,” Hoefner said. “Obviously it hurts, but the question is, does it go on two or three years? That’s a very different scenario.”
He said he recently talked to a man who raised money for startup agricultural technology ventures through crowdfunding, nearly all of the money from farmers.
“They had so much money, they had to put it someplace,” Hoefner said, even unproven agriculture technology. “If people are doing that, I’m sure they can get through a year’s worth of $3.70 corn or whatever it turns out to be. The question is how long it lasts.”
Jochem, the Ainsworth farmer, said the good news is that his crop looks excellent and wasn’t damaged by storms that visited some farmers this year. But he figures it costs between $4.20 and $4.50 to produce a bushel of corn, well below the going price of about $3.50.
In recent years, Jochem has replaced some irrigation equipment that was beyond its useful life, gaining efficiencies. He has reduced his debt, and is in the best financial shape of the past decade.
“At $7 or $6 for corn, it made things a little easier,” Jochem said. “But if it stays like this, I don’t think anybody can go two years,” without off-farm income, he said.
If you want to get out of debt, he said, you could sell farmland, but any gains from a land sale would be subject to taxes, and he views owning land as sort of a financial insurance policy.
“Interest rates, that’s what’s keeping us from going back to the 1980s,” Jochem said. “My grandpa always told me, do what the bankers tell you. If you’re going along with them, they’ve got to stay with you a little bit.”
Jochem said he can “cash flow” his debt, at least on paper. “But I want to know the truth. The end deal is what you get per bushel when you’re done.”
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