Does it Feel Like the 1970s?

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  • The record soybean price prior to 2008 was $12.90, which was set in 1973
  • USDA has projected net farm income in the U.S. for 2010 at $81.6 billion

 

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, fertilizer, chemicals 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 kent.thiesse@minnstarbank.com.

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