Druing the recent farm bill debate in Congress, I heard many claims of dire farm financial situations caused by record “low” prices. Could it be that these record low prices are actually right where they should be? And were those “high” prices, which we remember so dearly, just abnormally high?
If true, that's a scary thought for those of us who would like to farm for another 25 years. The basis for this thinking is two-fold:
First, recent technology additions to our production machine (Roundup Ready and Bt) provide a level of production security that we've never seen before. This technology limits some of the fluctuation in yield, and thus mutes price swings.
In most businesses, if there is uncertainty regarding production capability, the manufacturer demands a higher price. As technology is refined, prices generally plummet. A classic example is the computer and what the microchip helped accomplish for that industry. Comparatively, biotechnology is agriculture's “chip” to the tech world.
Second, it seems fair to compare South American producers and American farmers with Wal-Mart vs. local mom-and-pop stores, respectively.
Wal-Mart may be a ruthless marketing machine, but it has set the standard for retail business in America. While we may be nostalgic about our industry, I assume South America will follow a Wal-Mart mentality for the grain buyers of the world.
Business education teaches that the market price for a given product will eventually migrate toward the lowest cost to produce that product. In agriculture, now that we have a reliable product that is readily available, production expands and prices fall.
However, since the 1930s, government farm programs have not used the cost of production for setting loan rates and target prices, thus they became an artificial market price. The LDP program and transition payments are now allowing the real value of grain to be expressed.
When I look around the world, I discover that agriculture is the entry level for a country's economy. Manufacturing would be second. When a country reaches self-sufficiency, it then looks to the export market to further enhance the industry and its economy.
South America is only the first of many developing economies we will have to compete with. The former Soviet Union could be next.
Agriculture is still prevalent in the U.S. mainly because of government participation. And I, like most of you, need the farm bill to stay in business. But aren't we really just like the drug addict who needs the daily fix because the pain of withdrawal is just too painful to comprehend?
If I am going to succeed in agriculture today, I need to have a production cost that competes with those around the world. The way to do that is with volume and tight controls on expenses, much like Wal-Mart.
Personally, I'd prefer not to become the ruthless bully on the block, but I wonder if I have a choice.
Steve Pitstick is a 1,500-acre corn and soybean farmer from Maple Park, IL. He can be contacted by e-mail at: [email protected].