Does it Feel Like the Late 1970s?

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

  • Soybean futures on the Chicago Board of Trade (CBOT) traded above $13.50/bu. for much of the first nine months of 2011, before dropping to the current levels slightly below $12/bu. The record price prior to 2008 was $12.90, which was set in 1973.
  • July CBOT corn futures were above $7/bu. on several occasions in 2011, before dropping back to the current levels of near $6.
  • USDA has projected net farm income in the U.S. for 2011 at $100.9 billion, which is up $21.8 billion from 2010. All of the top five U.S. farm earnings years have occurred in the past decade, topping $80 billion in 2004, 2008, 2010 and 2011.
  • Overall U.S. farm debt-to-asset ratio is now estimated at about 10.4%, which is the lowest in decades, and the total farm-based equity (net worth) in the U.S. is now estimated at over $2.10 trillion, which is the highest ever, which increased by $160 billion from 2010 to 2011.
  • Exports of farm products to China and other countries continue to be very strong, with exports of beef and pork reaching new highs in 2011.
  • Average land values in Iowa were up 32.5% at the end of 2011, compared to a year earlier, which was the highest annual percentage increase ever, and land values have increased by 53% since 2009, which is more rapid rate of increase in land values than in the 1970s.
  • Land rents for cash rental contracts in most areas of the Midwest are expected to be up 10-20% for 2011, as compared to a year earlier, and will have increased 30-50%, or more, 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 many people talking about a potential downturn in the agriculture economy anytime soon.

Usually, when everyone is thinking one direction is when things change, and sometimes those changes can occur quite rapidly. In 1979, following some very robust farm income years, 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 1980s, there are some yellow caution flags to think about with today’s agriculture economy:

  • The cost of production for corn and soybeans, including seed, fertilizer, chemicals and fuel is expected to increase again 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, means that the breakeven price for corn production is now near $5/bu. for corn, and approaching $11/bu. for soybeans. This could become a serious issue, if the grain prices start to drop rapidly.
  • What will happen to grain prices if export markets soften in the next couple of years, or if there is reduced grain demand for renewable fuel production, or if we have record crop production?
  • Will the land purchases at today’s prices still be economically viable at grain prices of $4/bu. for corn and $9/bu. for soybeans?
  • What would be the impact on grain prices, land values, the farm economy, etc. if some world-wide 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 2012 from a farm profitability standpoint in both the crop and livestock sectors, as well as for the overall agriculture economy in the U.S. Interest rates remain very 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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