Farm management strategies in times of rising volatility02/27/2020 | Economics
By Bethany Baratta, ISA senior writer
Tight margins and volatility are expected to stick around for a while longer. Softening demand and slower export growth pegs U.S. agriculture in what Jason Henderson calls a plateau.
“If history is correct, exports will grow about 2 to 3% in a plateau,” said Henderson, associate dean of the College of Agriculture at Purdue University. “If we’re growing less than 2%, we have other problems.”
During plateaus in U.S. agriculture, farm incomes grow slowly. He noted the plateau between 1955 and 1972, where U.S. farm income was $79.5 billion. Another plateau was 1989 to 2003, with U.S. farm income at $75.9 billion. The most recent plateau started in 2016. Since then, U.S. farm income has averaged $80 to $85 billion. The U.S. Department of Agriculture expected net farm incomes to rise 1.4% in 2020.
How do farmers respond to plateaus?
Henderson says they limit capital investments like tractor and equipment purchases, but they are still in the land market.
“Profitability comes from productivity,” Henderson told a crowd at Commodity Classic in San Antonio earlier today. Farmers manage their input costs while striving to achieve higher yields.
“And in thin margins, low-cost producers win,” Henderson said.
Information from the Purdue Center for Commercial Agriculture shows that the number of farms in financial stress is climbing, but the level remains below most of the last three decades.
Working capital has declined since 2012, says Michael Langemeier, professor in the department of ag economics at Purdue University. Knowing your cost of production and breakeven levels can help avoid financial stress, he says.
Fred Seamon, executive director of commodity research and product development for the CME Group, suggested that farmers look for additional ways to diversify their farm income. First though, farmers ought to look for any inefficiencies which may be present in their existing operation. He said comparing the financials before and after adding another revenue stream will help determine if the opportunity makes sense for the farm.
Think like a grain merchandiser
Historically, the United States has been the No. 1 exporter of soybeans. However, the global market is shifting, and South America is snagging some of the United States’ share of the global market.
The world is looking at the United States as a residual supplier rather than the primary supplier, Seamon said.
With that shift comes an opportunity for U.S. farmers to get paid to store commodities. It requires a change in mindset, Seamon said.
“Transition from a farmer with grain to sell to a grain merchandiser mindset, looking at the pricing opportunities,” Seamon said.
Farmers looking at their commodities with a grain merchandiser mindset can improve their storage returns by capturing seasonal increases in basis and futures contract spreads.
The January Purdue University/CME Group Ag Economy Barometer, a nationwide measure of the health of the U.S. agricultural economy, showed a positive increase in farmer sentiment about ag economy expectations.
The Ag Economy Barometer rose to a reading of 167 in January, a 17-point hike from the December survey. James Mintert, a professor in the department of ag economics at Purdue and a principle investigator for the Barometer, said the signing of the Phase 1 agreement between the United States and China attributed positively to farmer sentiment.
More than 50% of the respondents said they either had no plans to grow their farm within the next 5 years or planned to exit or retire. That’s an opportunity for the other 50% who plan to grow, Mintert said.
Contact Bethany Baratta at firstname.lastname@example.org.
Additional Recommended Articles for this topic:
For media inquiries, permission to republish articles or to request high-res photos, please contact Katie James, ISA Public Relations Manager at email@example.com. © 2020 Iowa Soybean Association. All rights reserved.