One of my favorite songs in my younger years was the theme song to the movie The Good, the Bad and the Ugly. The characters in the movie did not have to say much to say a lot. Present day agriculture can be depicted by the same title.
One of my friends who works in farm management called the other day. We’ll call him Lt. Dan, and I am Dr. Forrest, of course. He discussed that when he works with grain producers, it is like working with the newly rich and famous. He then meets with a livestock producer, and he comes away thinking that he has visited a third world.
Welcome to the wild world of global economics, where wide ranges and disparity in income are based upon enterprise selection. Paper gains or losses on the balance sheet are abrupt and magnified as a result of changes in the weather, global markets, government and Federal Reserve policy.
Stepping back to observe the big picture in recent years, there has been a mass exodus from and consolidation of the livestock and poultry industries. In my travels I have noticed producers are selling dairy and beef cows, and swine and poultry buildings are being shut down or left vacant due to the high cost of feed also. Some are indicating to me that it is much easier to make money in the grain industry, with less labor-intensity, particularly if they have high-quality land adaptable to shift into a grain enterprise. Others find that increased regulation and intensification of existing rules regarding livestock are impediments to continue.
Thus, my friend, Lt. Dan, is spot-on in his observations. Unfortunately, many livestock producers have had an insufficient duration in the profitable cycle to replenish equity, liquidity and cash flow. The next six to nine months could be “bad” if prices fail to catch up with input costs. If a back-to-back drought were to occur, particularly in the Midwest or South America, then the “ugly” will result, which will be a major paradigm shift for the livestock sector.
The grain side can be characterized as the “good.” All the positive elements of demand, supply, an expanding ethanol industry, low value of the dollar and low interest rates have converged to cause the best of times. The “millionaire next door” is now the grain producer, both in profits and appreciated net worth on the balance sheet. Will the “bad and ugly” livestock industry eventually impact the grain industry? I have heard it said that we need an economically healthy livestock industry to have a profitable grain industry in the long run. As Lt. Dan and Dr. Forrest watch the good, the bad and the ugly ride off into the sunset, only time will tell.
Editor’s note: Dave Kohl, Corn & Soybean Digest trends editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups. He can be reached at [email protected]