WASHINGTON, July 16, 2014 – Rising commodity prices resulted in record high farm incomes and land values in recent years, but experts warn those days may be coming to a rather abrupt end, bringing swift repercussions to landlords, input suppliers and taxpayers who may see farm program costs rise again.
As commodity prices steadily decrease, some in the agricultural sector are projecting the lowest average incomes in 10 years, despite a projected yield increase from 2013’s record corn crop.
Gary Schnitkey, with the University of Illinois’ Department of Agricultural and Consumer Economics, says the average net income for an Illinois grain farmer with a 1,400 acre operation is projected to be $45,000, a figure “considerably below any average income level since 2006.”
Schnitkey’s estimate is also significantly lower than the averages of $134,000 in 2013 and about $250,000 in 2012, when drought-triggered crop insurance payments accounted for about a third of producers’ revenue. Schnitkey points to grain prices and cash rents as the primary reasons for the projected decline in profit, or, in some cases, losses.
“What we saw was (between 2006-2012), cash rents increased quite a lot, and farmers were still making pretty good money as (commodity prices) were increasing,” Schnitkey said. “Now, with returns lower, it’s going to cause those cash rents – even in an average situation – to be negative in returns.”
John Anderson, deputy chief economist with the American Farm Bureau Federation, said the significant decline in farm incomes in Illinois, one of most productive states in the union for row crops, will likely echo throughout the country.
“Obviously, we’re looking at lower commodity prices on grains and oilseeds and probably cotton this year, so for areas that tend to be pretty heavy in row crop production, I think we’ve got to expect lower incomes this year,” Anderson told Agri-Pulse.
Pat Westhoff, director of the University of Missouri’s Food and Agricultural Policy Research Institute, said some input costs have decreased, but that won’t be “nearly enough to offset the sharp drop in receipts that the crop sector is going to receive.”
While Schnitkey, Anderson, and Westhoff held to the common theme that crop incomes will likely decrease in 2014, all three said livestock profits will likely offset – to a degree – the drop in overall farm income.
“Livestock producers as a group are probably going to be better off this year than we might have guessed even earlier this year,” Westhoff said. “Feed costs are lower, the only offsetting thing of any importance there, frankly, is going to be the disease problems in pork.”
The drop in farm income doesn’t come as a huge surprise, but with corn futures trading below $3.90 a bushel, around four-year lows, the harsh reality of the prediction is starting to hit home. In February, USDA’s Economic Research Service forecast 2014 net farm income at $95.8 billion, a drop of almost 27 percent from the estimated $130.5 billion in 2013.
Farmers are already tightening their belts and some are thinking about what was almost unthinkable a couple of years back: trying to renegotiate high-priced cash rents.
“It’s going to be a brutal conversation,” says Matt Roberts, Extension Ag Economist for the Ohio State University. “One of the things I encourage growers to do is start asking themselves, ‘At what point am I willing to fire a landlord? I think that time is going to come when some producers are literally going to have to walk away from the land they are producing on now, simply because the landowners aren’t going to be willing to accept the lower rents that the current market conditions justify.”
How all of these economic factors will impact the 2014 farm bill commodity programs, remains to be seen. Later this fall, producers have a choice between price loss coverage (PLC) and agriculture risk coverage (ARC), which offer various levels of protection and payouts depending on different scenarios, including a Supplemental Coverage Option (SCO) with PLC. As producers consider which program best fits their operation, experts say it is nearly impossible to predict fiscal impact until program enrollment numbers are known.
To receive payments under PLC, the annual, the annual national-average market price has to dip below pre-determined reference prices. Schnitkey said markets could spend some time below the reference prices currently set at $3.70 per bushel for corn, $5.50 per bushel for wheat and $8.40 for soybeans, but it was unlikely to set annual averages below those levels. At the close of markets on Tuesday, pit trade for the December corn contract on the Chicago Board of Trade was set at $3.81 3/4 per bushel, November soybeans at $10.86 1/4, and December Chicago wheat was at $5.61. At this point, payments for southern crops, like rice and peanuts, seem more likely.
“To me, a lot of this is really going to hinge on participation, and right now, we don’t even have the rules yet for the programs much less knowing anything about participation,” Anderson said. “Until we know more about participation, it’s going to be really difficult to know what this thing is going to cost.”
While the unknown participation factors make it difficult to predict the cost of the Farm Bill’s commodity title, Schnitkey, Anderson and Westhoff all said that the question is not “if” land values will drop, but rather by how much.
“It’s almost always the case that if there’s a big change in expected profitability for agriculture for an extended period of time, it ends up getting reflected in land values, both rental rates and the actual purchase prices or land,” Westhoff said. “If we have changed market psychology already and make it change even more in the months ahead, there’s going to be downward pressure more than there’s been on these land values.”
Schnitkey said he expects land prices to drop, but not dramatically because he thinks the market will still view land as a sound investment.
“The thing farmland has going for it is that it’s a real asset,” Schnitkey said. “There’s a lot of people who recognize that if they sold farmland, they would be putting money into financial assets, none of them any safer than farmland.”
While the downtrend in farm income might shake a producer’s balance sheet, Anderson doesn’t think the forecast drop in income will leave any permanent scars on most producers.
“I don’t think that we’re talking about any kind of historic collapse in farm income or anything like that,” Anderson said. “We’re coming down from record levels, don’t forget, over the last couple of years . . . Obviously the adjustment can be painful, and that’s something we want to avoid . . . At the same time, I don’t think anybody expected a new record every year.”
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