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| Crop Prices Rosy, But Farming Still Thorny | ||||
| Can you believe these grain prices? Farmers
gotta be riding high on the hog, rolling in dough, and buying new his-and-her
pickups, right? Well, not so fast. First off, most people outside of farm country don’t realize that futures prices don’t equate to actual farm prices. Take wheat futures, for instance, trading at historic levels this fall in the $8/bu range at Minneapolis and in the $9/bu range at Chicago. The reality is, no farmer in the U.S. is actually selling wheat at the futures price. As farmers are well aware, the local price is far different, reflecting handling charges by the buyer, transportation costs to the end user and availability of storage. This difference between the futures price and the farmer’s local cash price is called the ‘basis.’ So wheat futures at $8-$9 will be closer to $7-$8 at the local grain elevator – before quality discounts, that is, which can and often do knock the price down even further. Consider too that many farmers already sold a good share of their anticipated new crop wheat last spring, in the $4.50 range. Seasonally, prices received by wheat farmers are usually at their highest in the spring, before dropping into harvest when prices are usually at their lowest. However, this year is one of those rare occasions when prices are high at harvest, because of low wheat supplies across the world. Nevertheless, a lot of farmers are committed to selling wheat at a price that was viewed as decent last spring, but will miss out on the prices that are incredibly high now. And high prices mean nothing if there’s no crop to sell. In the Northern Plains, crops have been pockmarked or zeroed out by too much water in some places and not enough in others. Some crops were flattened by the “great white combine” – hail. Farmers will tell you that crop insurance will cover about what it cost to produce the crop, with no return to family living. It’s about a breakeven deal at best. Then there are the expenses. Crop prices are higher than they were five years ago, but so are costs. Let’s start with interest rates. According to Andrew Swenson, North Dakota State University Extension Service farm management specialist, interest expense as a percent of gross revenue was 6 percent in 2005 and 7.2 percent in 2006 for more than 500 farms enrolled in the North Dakota Farm Business Management Education program. Interest as a percent of gross revenue is a figure that lenders often consider when determining borrowers’ credit risk. To better understand the impact on the bottom line, a farm with gross revenues of $300,000 required 5.6 percent, or $16,800, of those revenues to cover interest costs in 2003 and 2004. Last year it took 7.2 percent, or $21,600. This additional $4,800 of costs causes an equivalent reduction in net farm income. Machinery and input costs including fuel and fertilizer remain near or at historical highs, and these higher costs offset crop revenue gains. Total non-land costs for corn production are projected at $314 per acre in 2008, an increase of $57 per acre from the 2001-2005 level, according to the University of Illinois. The largest increases come from fertilizer at $27 per acre, seed at $11, crop insurance at $5, fuel and oil at $5, and crop insurance also at $5, according to U of I Extension economist Gary Schnitkey. Total non-land costs for soybeans are projected at $199 per acre in 2008, an increase of $28 per acre, with the highest increases coming in seed ($9), fertilizer ($8), fuel and oil ($5), and interest ($5). Lower projected government payments also cut into the higher projected revenue. Exact commodity programs will not be known until the new farm bill is passed so Schnitkey assumes a continuation of the 2002 farm bill levels of support. Due to the way that program operates, he expects government payments to decline by $27 per acre in 2008. Then there’s the price of land. Ninety percent of the 214 respondents providing forecasts for the 2007 South Dakota Farm Real Estate Market Survey expect land values to increase in the next 12 months, the highest proportion of respondents forecasting land value increases in the 17 years of survey reports. Statewide in South Dakota, cropland and rangeland values per acre have doubled since 2002 and tripled since 1996, and cash rental rates have nearly doubled since 1993, according to the South Dakota State University survey. Land value increases from 2006 to 2007 (10% or more) are the third highest annual rate of change in the past 16 years, exceeded only by higher annual percentage rates of change from 2003 to 2005. Similar increases in land value are occurring elsewhere in farm country, affected in part by the increasing value and buy up of land for hunting, but also because of crop prices. This is good news for land owners, but not for land renters. About half of planted cropland in 2002 was rented, according to USDA. A good share of these cropland renters are younger farmers. Look, I don’t want to be a wet blanket. Crop prices are rosier now than they have been in the past, but farming as a business remains as thorny today as ever. Policymakers, the media and the general public need to understand that while crop prices are better than they have been in years past, farming remains rife with risks, which must be recognized and managed accordingly through farm policy and by farmers themselves. |
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