Does it Feel Like the 1970s?

 

During the past few years, many have been drawn many to make comparisons with the agricultural economy that existed in the late 1970s, with record grain prices, high farm profits [2] and rapid increases in land values [3]. Here are some things to consider:

  • Soybean [4] futures on the Chicago Board of Trade [5] (CBOT) have been trading above $13/bu. recently. The record price prior to 2008 was $12.90, which was set in 1973.
  • July corn [6] futures have been very close to $6/bu. in recent weeks, which surpasses the previous record price, prior to 2008, which was set in 1996.
  • USDA has projected net farm income in the U.S. for 2010 at $81.6 billion, which is up $19.4 billion from 2009. All of the top five U.S. farm earnings years have occurred in the past decade, topping $80 billion in both 2008 and 2010.
  • Overall U.S. farm debt-to-asset ratio is now estimated at about 10-11%, which is the lowest in decades, and the total farm-based equity (net worth) in the U.S. is now estimated at over $1.86 trillion – the highest ever.
  • Exports of farm products to China and other countries continues to be very strong, reaching $113 billion in 2010. The strong export demand is being driven by the lower value of the U.S. dollar and rapidly increasing middle-class population in many developing countries around the world.
  • Land values in Iowa were up 16% at the end of 2010, compared to a year earlier, and have increased 93% since 2004, which is comparable to land value percentage increases from 1973 to 1976.
  • Land rents for cash rental contracts in most areas of the Midwest are expected to be up 10-15% for 2010, as compared to a year earlier, and will have increased 30-50% in the last three or four years in many areas.
  • Everyone is bullish on the future of profitability in production agriculture. It is hard to find anyone talking about a potential downturn in the agriculture economy anytime soon.

 

Raise the caution flag

 

Usually, when everyone is thinking one direction is when things change, and sometimes that changes can occur quite rapidly. Just look what happened to the home real estate market across the U.S. in the last 24-36 months. In 1979, the U.S. government implemented a grain embargo that caused a rapid decline in grain exports and resulted in much lower grain prices. This rapid drop in grain prices, along with lower farm profits and much higher interest rates, led to the farm crisis of the 1980s. While economic conditions in the U.S. are much different than in the late 1970s and early 1980’s, there are some yellow caution flags to think about with today’s agriculture economy:

  • The cost of production for corn and soybeans for seed [7], fertilizer [8], chemicals [9] and fuel is expected to increase 10-15% for 2011, and is nearly double the cost of production five to six years ago.
  • The increased cost of production, combined with the higher land rents in most areas, means that the breakeven price for corn production is now near $4/bu. for corn and $9.50 for soybeans – something to keep in mind if the grain prices start to drop rapidly.
  • What will happen to grain prices if export markets start to soften in the next couple of years, or if there is reduced grain demand for livestock production or renewable fuel production?
  • If land is purchased at today’s prices, will that land purchase still be economically viable at $3.50/bu. corn prices and $8.50/bu. soybean prices?
  • What would be the impact on grain prices, land values, the farm economy, etc., if some worldwide event – such as a terrorist attack, disease outbreak, etc. – occurred in the next 12-24 months?
  • Are farm businesses adequately prepared from a risk-management standpoint to withstand a major downturn in the agriculture economy in the next one to two years?

 

Prospects look good for 2011 from a farm profitability standpoint, especially in the crop sector, and for the overall agriculture economy in the U.S. Interest rates remain low for both farm operating loans and longer term loans to meet agriculture credit needs. However, producers, agri-businesses and others connected to the agriculture industry need to be wary of warning signs that things could be changing in regards to farm profitability and loan repayment ability. Farm operators need to work with their farm management advisors and ag lenders to develop sound risk management and financial management strategies to protect the financial stability of their farm businesses for the future.

 

Editor’s note: Kent Thiesse is a former University of Minnesota Extension educator and now is Vice President of MinnStar Bank, Lake Crystal, MN. You can contact him at 507-726-2137 or via e-mail at [email protected]