We have a great resource in University of Minnesota’s FINBIN data that Bob Craven’s team gathers along with the diligent work done by farm management teams in analyzing and summarizing the results. That data provides some perspective on how financial results have dramatically changed since the go-go years of 2007 to 2012 for the grain industry. In my assessment, the period from 2007 to 2012 was an economic aberration and the periods prior and post 2007 to 2012 may be more the normal standard.
An economic aberration or not, record profits during the period from 2007 to 2012 were set up by a convergence of timely events. To start these events was the growth in emerging nations tied with the great recession that resulted in the Federal Reserve lowering interest rates and devaluing the dollar, which encouraged agricultural exports. Add the biofuel mandates and weather factors which occasionally resulted in grain supply shortages and you have the fuel for record profits. For the group of nearly one thousand grain producers represented in FINBIN data, the median net farm income from 2007 to 2012 was approximately $170,000 in constant 2014 dollars. Contrast that to the five-year period of 2002 to 2006 where the profits were approximately $67,000 for producers in the data summary. The period from 2007 to 2012 exhibits nearly 2.5 times greater profits than the prior period. The bottom line for grain producers is to realistically recognize this recent super cycle is not typical.
When considering the rest of the story, we see that profits of the FINBIN grain producers have dropped like Clayton Kershaw’s curveball, major league baseball’s 2014 most valuable player from the Los Angeles Dodgers. Grain producers in the 2013 to 2014 period had a median net income of approximately $33,000. When compared to the 2001 to 2002 period, just prior to the commodity super cycle, the median net income was approximately $37,000. A long term trend cannot be determined by two year periods prior or post; nevertheless, adjustments in profit levels appear to be settling in. Multi-year, high profits cause margin compression as fixed and variable costs increase. This is just another example of the old saying, “high profits cure high profits.”
Next time I will discuss the adjustments producers will need to make to be successful in the current economic environment.