This winter, I've had many calls from farmers who say that the farm economy is perplexing them. Why, they want to know, are land prices and rents continuing to increase, yet grain prices are at 30-year lows? What is different? What has changed? How can you react to this environment and manage your risk? Is there a future in this business?
My answer is that there is a great future in this business. But we will have to carve it out and control our own destiny … or someone else will.
On Jan. 29, I was at a client's place with my partner, Terry Jones, planning for the next year. Hidden behind our client's fax machine were grain price quotes for the same day four years earlier. It was interesting to compare those prices to current price levels. Here's the comparison:
|Jan. 29, '98||Jan. 29, '02|
Obviously, the prices do not indicate an inflationary environment for agricultural prices. Demand is increasing, carryover stocks are slowly decreasing, yet price isn't responding. Why?
Perhaps the explanation can be found in the value of the dollar. The above price declines for corn and wheat are 17% and 21%, respectively. It's interesting to note that the value of the dollar has risen about 17% since January 1998, from 100 to 117. (See the chart, below.)
Our risk management is highly dependent on worldwide currency values, of which we have no control. As the value of the dollar increases compared to foreign currencies, our products become more expensive.
That is the paradox. Our prices decrease. But, at the same time, those buying our products with their currency are paying more. Today, Japan is paying nearly as much yen for a bushel of corn as we would have paid when our corn prices were approaching $5/bu. Do you think the Japanese are going to buy our products ahead of what's needed or buy hand-to-mouth until things change?
We've often said that we wanted to compete in a world environment. Now that we are, it's not very pleasant.
A risk management tactic we can employ is identifying local value-added markets for our products. I believe if we identify end-user demands for identity-preserved grains, we can develop more consistent gross-dollar-per-acre income. We can even increase it significantly over the next several years.
With genetic enhancement opportunities, we can go to end users to identify the traits they need. Then we'd have seed companies build our “market,” so to speak. It may be specific grain for hog, poultry, or dairy producers. It could also be for alcohol, fructose, or any other industrial or food products.
Another risk management technique is to provide those end users with source-verified data and records. Will it result in higher prices for our grain? Most likely not, but you will have a market for your grain.
Without these alliances, you will likely receive even lower prices for your grain than are discounted from current prices. We have seen this happen in the pork industry already. Improved quality is the standard, and those who do not produce it sell their pork at a discount.
There is tremendous opportunity in production agriculture if we “go for the gold,” with Olympic goals and expectations.
Moe Russell is president of Russell Consulting Group, Panora, IA. Russell previously spent 26 years with Farm Credit Services as a division president. For more risk management tips, check his Web site (www.russellconsulting.net) or call toll-free 877-333-6135.