Farmers in the Rabo AgriFinance tent at the U.S. Farm Progress Show in Boone, Iowa, in late August looked uncomfortable when Curt Hudnutt, Rabo AgriFinance’s chief credit officer, delivered the heart of his message: “We expect that corn and soybean farmers will lose money in 2015 and 2016.”
It was a hard message to take in. Hudnutt said, “We were able to make $400 and $500 an acre in net profits over the last few years, with $7 corn and $14 beans. Even though that cost structure was increasing, we were able to make money.”
Hudnutt said good times drove complacency. Now that things look a little less bright, “a new normal is ‘how do we manage our loss?’ We’re used to what the normal became: those high prices.”
With lower grain prices in the forecast, farmers are going to have to manage their cost structures.
One of Hudnutt’s suggestions for action is to take a look at production costs — not only across your whole operation, but also for each individual parcel of land. With that information in mind, look at rental agreements. With each piece of land, he said, ask yourself “Should I keep it or let it go?” For many farmers, he said, the decision to let land go and farm fewer acres requires a mindset shift.
Another suggestion to lower costs is to look at new machinery purchases. With lower commodity prices, “Maybe rolling every year or every two years or every three years isn’t appropriate for me.”
Locking in input costs is another possibility. While Iowa farmers often lock in lease rates or costs for seed corn, Hudnutt said, “they’re not as active in fertilizer.” He also things farmers might be able to take advantage of more opportunities to lock in chemical prices.
After years of rising equity, partly due to increases in land prices, Hudnutt said, “balance sheets are going to get worse. “
He was careful to say that Rabobank is not calling Midwest land prices a bubble. “We’re not looking at a 30, 40, 50 per cent decrease in values. We think we’ll see a correction.”
However, any correction will hurt a farm’s balance sheets if the statements have been adjusted each year to reflect rising market prices for land.
Over the last 10 years, Hudnutt said, “several million acres of marginal land came into soybean and corn production.” This happened because farmers were able to make money doing it. Now some of that land will be taken back out of production. Not so much in the Corn Belt, he said, but in the western states and the South.
Hudnett suggested that farmers take a good look at their own marginal land. “It may not be a bad time to get rid of it,” he said. “Cash is going to be very important over the near term.”
This year and in the years to come, Hudnutt said, farmers may need to focus on limiting losses, rather than locking in profits. “That’s, I think, a hard pill for some of us to swallow.”
From a lending point of view, Hudnutt is clear that Rabo AgriFinance is sticking with the U.S. market through this downturn. In fact, he sees some upside. “I think it’s a lot easier in bad times to identify a good producer than it is in the good times. Good times mask a lot of producers that were marginal or average. But tough times, that’s where the cream rises to the top.”
Stephen Nicholson is part of Rabo AgriFinance’s food and agribusiness research and advisory group, a corporate team of more than 80 analysts in 14 countries. Nicholson expects tough times ahead in the Midwest. “We’re going to see the marginal producers probably struggle,” he told farmers.
“There’s going to be some change in ownership of land and farms in the U.S. with this downturn in grains and oilseeds.”
Nicholson expects lower commodity prices to result in more diversification. “Here in Iowa, it’s been grain and oilseeds,” he said.
In the Dakotas and Kansas, farmers have expanded into corn and soybeans. Nicholson expects some of that to change. “That land will either go fallow, or we’ll see them go back and produce wheat.” Generally, Nicholson, said, “We’ll see different types of crops produced that they haven’t produced in a number of years.”
“Right now it looks a little grim,” said Nicholson. Some farmers may be having a hard time seeing a light at the end of the tunnel. However, he said, “We still have droughts. We still have demand-led rallies. And I think that those aren’t going away.”
There have been big changes in world markets. “Over the past 20 years, the United States has become the supplier of the world,” Nicholson said. “In the last five years we’ve seen that change dramatically. Our share of the world grain trade is much smaller than it used to be.”
In the past, U.S. supply problems would be felt around the world. Now, world supply of agricultural commodities is more diversified.
Nicholson mentioned logistics as a major issue in world agricultural exports. Brazilian farmers face tremendous challenges with the road network: “mud, potholes, narrow, two-lanes, speed bumps in the oddest places.”
“The good news for American farmers is they [Brazilian farmers] can’t get their production from where it is to where it needs to go. The bad news is that they can produce a lot of grain really fast.”
And it’s not just the roads the cause logistic problems in Brazil, Nicholson said. “It’s truck, roads, rail, ports — the whole thing.”
As Canadian farmers know, Brazil isn’t the only country with logistics issue. Nicholson referred to the low prices corn growers in the Dakotas are seeing due to rail transportation problems. He also said some U. S. processors are having trouble getting the raw commodities they need, “and they’re paying astronomical prices to get it there.”
Water is another challenge on Nicholson’s radar. Water quantity and quality. “In Iowa we don’t have a problem with water, but we have an issue with water quality.” Some Midwest farmers have trouble with nitrogen leaching. “I think that is a huge issue everywhere,” Nicholson said.
Despite changing markets and logistic challenges, Nicholson has seen a lot of recent worldwide investment in the agriculture industry (including Glencore’s purchase of Viterra). He doesn’t see that slowing anytime soon, as countries and corporations scramble to develop or maintain access to food supplies.
“We think there’s going to be lots of investment in agriculture.” †