Three experts outline what ag producers should expect for 2011
What do you project for crop profitability?
Westhoff: Unfavorable weather reduced production this year in Russia, Ukraine and Kazakhstan. Uncertainty about the size of the U.S. corn crop also supported prices. Meanwhile, global grain and oilseed demand is strengthening, with rising use of livestock feed in China and other countries and growing biofuel production in this country. Crop prices and profitability grew higher than was expected earlier this year. How long this lasts depends on a wide range of factors, not the least of which is weather. Bumper crops around the world in 2011 could lead to sharply lower prices, while another crop shortfall could send prices even higher.
Duffy: Crop prices are up due to demand for wheat and prospects for a bit lower corn crop. 2011 profitability should be good, as production costs should remain essentially unchanged from a year ago.
Oldvader: The demand/supply curve is at work again. Limited stock carryover plus reduced domestic production multiplied by robust domestic and foreign demand equals bull markets for major crops. At this writing, USDA reduced corn yield projections by 2.5 bushels an acre. Multiply that by 81 million acres and you have a lot of corn. Soybeans should fare better on the production side with anticipated record yields. Export demand from China remains bullish. Crop margins will undoubtedly narrow—while prices may firm on a higher-than-normal plateau, input costs will erode profits. Most notably, energy costs will drive fertilizer prices up with seed costs following suit. Patent expirations, however, may spread the wealth in the chemical arena, keeping costs relatively stable.
What’s in store for livestock?
Westhoff: Livestock product prices generally increased in 2010, and profitability in the first seven months of the year improved over 2009 for most producers. Factors leading to higher livestock prices in 2010 included reduced meat production in response to 2009’s low returns, and more favorable demand here and around the world. However, the sharp recent increase in feed prices will negatively affect livestock producers in the months ahead.
Oldvader: The livestock industry responded admirably to high feed costs and reduced demand in 2008/2009. With the return of above-average feed costs, producers will again limit expansions and capital investments. Much depends on how much producers restored liquidity and equity over the past year. Livestock profitability will remain soft, yet better than in 2009. Enhanced domestic demand will not immediately solve the price issue. Stronger emerging world markets and a competitively valued dollar may minimize further challenges to our livestock industry. Approximately 40 percent of our crop production enters the livestock gates, making a healthy livestock industry vital to agricultural profitability.
What’s happening with farmland values?
Westhoff: USDA recently reported national average farmland values were about 1 percent higher on Jan. 1, 2010, than on Jan. 1, 2009. Recent reports suggest that average farmland prices continue to rise, but regions and counties vary. If strong crop prices and profitability continue and interest rates continue to be low, farmland values will likely increase. But the market remains sensitive to both good and bad news.
Oldvader: For more than 40 years, FCS Financial has tracked land values on 18 benchmark farms spanning our 102-county lending territory. In 2010, demand for high-quality cropland remains solid with an average increase of 3.65 percent compared to the previous year. On the other hand, we see soft demand for marginal cropland and pasture with an aggregate decrease of slightly more than 3 percent. Clearly, the market is beginning to discriminate based on projected returns, but no land is deflation-proof. Farmers are purchasing most high-end land, and a large number of sales are in cash. With low interest rates, minimal options for safe alternative investments and continued positive crop margins, productive land should support greater price and rental stability while marginal land prices remain volatile.
Duffy: Land values have stabilized after some drops in the past year. The weak economy is creating good demand for land, with higher-quality land showing the most strength. We aren’t seeing as many sales because people want to hold onto land.
How much are we in debt?
Oldvader: U.S. farm debt is estimated to decline approximately 4 percent in 2010 from $245 billion to $235 billion. Most of the decrease is in the non-real estate sector, reflecting reduced demand for operating credit as well as restraint on capital purchases. FCS Financial’s traditional producer portfolio remains relatively constant, while agribusiness volume has declined. We expect our overall loan volume to decline approximately 3 percent for 2010. USDA forecasts that net farm income will rise by approximately 25 percent for 2010, driven primarily by renewed livestock earnings. Farm foreclosures remain subdued locally and nationally. Agriculture remains strong, even during a period of severe economic challenge. Perhaps lessons from the past paid dividends for farmers and lenders. I anticipate increased lending activities for 2011, with no increase in foreclosures.
Duffy: I think the worst of the livestock problems are behind us. But some people are still in trouble. Farmers in areas with poor harvests will be especially vulnerable.
Can producers access credit?
Oldvader: Due to agriculture’s strength, most lenders have not retreated from financing producers, with some exceptions in major livestock expansions or start-up operations. Credit appears to be readily available for creditworthy borrowers. Less than stellar credits may require additional collateral or shorter loan maturities. The cost of money remains a bright spot. In September, the Federal Reserve noted that the anemic economic recovery would result in an extended period of low interest rates. Little will be done to adjust rates until the country experiences sustained increases in manufacturing, notable reductions in unemployment, and stability in the housing industry. These moons may not align for 12 to 18 months.
Duffy: Lender surveys show that credit is available. There may be some higher down payments but, for the most part, people with good credit ratings shouldn’t have trouble getting money.
Does the dollar still move exports?
Westhoff: The dollar remains an important factor, but it’s far from the only one. Agricultural export demand also depends on the weather and the strength of the global economic recovery. This year, the drop in grain production in Russia and neighboring countries creates an opportunity for increased U.S. exports of wheat and other crops. Likewise, continued growth in Chinese livestock production and feed demand creates a growing market for U.S. soybeans.
Oldvader: The supply/demand needs of our trading partners remain the biggest motivator. Most leading U.S. ag customers are doing well. That, plus a weakened dollar, continues demand that began in 2009 to supply major economies with grains and animal protein. At this writing, the dollar continues to weaken against currencies of major U.S. ag importers like China, Japan, and Canada. This erosion is based on speculation that the Federal Reserve may implement additional programs to stimulate the economy. Look for exports to continue to support farm prices, but be mindful that the dollar is not the sole premise driving exports. Trade barriers, vital sanitary standards, and market shocks such as H1N1 all create volatility.
Duffy: Trouble around the Caspian Sea area has limited the amount of wheat available in world markets, helping to move U.S. exports. Exports will be okay in 2011, but nothing spectacular. We are still trying to get out of this economic situation.
How can we manage risk?
Westhoff: Producers have a wide range of tools at their disposal. As we saw in 2008 and 2009, when there is a widespread economic downturn, it’s more difficult to manage downside risk. Diversification, for example, doesn’t do much good if everything moves lower. Farmers should prepare for continued market volatility. Federal budgetary pressures related to the next Farm Bill might affect the government’s farm safety net.
Oldvader: In this environment, a well-defined business plan becomes critical for success. The plan must include risk mitigation tools such as breakeven analysis to establish price and cost targets for marketing and purchasing. Crop insurance is essential. It’s a good time to lock in interest rates for long-term assets such as land.
Duffy: Farmers should be aware of all available insurance tools and how best to use them. You should also understand futures and options alternatives available and take advantage of profit opportunities.
Will environmental legislation affect us?
Westhoff: It appears unlikely that cap and trade legislation will revive anytime soon. Whether and how EPA might regulate greenhouse gas emissions remains unclear, but this could have important implications for agriculture. Controversy will continue over how best to regulate everything from agricultural chemicals to egg production.
Oldvader: Cap and trade may lie dormant for some time. Congressional turnover, plus more pressing issues, might keep this one in hibernation. That does not mean all is quiet on the environmental front. Look for continued challenges related to EPA’s broader interpretations of the Clean Water Act. Additionally, attempted governmental oversight to control everything from atrazine to milk storage and spray drift to farm dust will challenge even the most patient farmers. To say nothing of animal welfare storm clouds looming on the horizon. Stay tuned.
Duffy: Farmers need to work with groups on different ways to manage runoff and leaching. The oil spill removed the hypoxia zone in the Gulf of Mexico from discussion, but this issue will resurface as things settle down.
Will the public support biofuel?
Westhoff: Important decisions will be made soon about whether higher-level ethanol blends will be available in the market and whether to extend biofuel tax credits and tariffs. As long as the renewable fuel standard continues to put a floor under biofuel use, the downside potential in biofuel markets is limited. The upside depends on policy and petroleum market developments.
What’s your top trend for 2011?
Westhoff: Over the last couple of years, the general economy’s impact on the farm economy has proven critical. If the worst of the recession is past, as many forecasters predict, we can get back to worrying about things like the weather.
Oldvader: Over my 39-year career, I have watched an expanding disconnect between the ag producer and consumer. Those of us in agriculture preach the value of our industry, but candidly, we usually preach to the choir. Equally concerning, few of the folks who promulgate laws and regulations governing our industry have a clue about agriculture’s impact on the economy. This issue will come to greater light as we incubate the 2012 Farm Bill. We’re doing a better job of communicating as an industry, but we have a herculean task of staying in tune with our audience.
Duffy: Food safety continues to be an important issue. If you are a new producer, or if you are struggling to find enough resources for a strictly commodity farm, you may find opportunities to capture extra income in the local food movement.
Give us your best piece of advice.
Westhoff: Continue to expect surprises. No one could have predicted everything that’s happened over the last five years. Be ready to take advantage of opportunities, but also be prepared for unpleasant news.
Oldvader: Develop a business plan as if you were preparing an initial public offering to attract investors. Ask your lender or Extension agent if they would buy stock in your business. This might help you see opportunities and challenges from a different perspective. In this volatile environment, the risks are great, but so are the rewards.
Duffy: If you are an older farmer, get plans in place for your future and the future of your farm. If you are a younger producer, look for options that won’t strap you with a lot of debt. If you are mid-career, be as efficient as possible. There are a lot of technologies out there, but make sure you can afford them. You should farm based on your resources, not on what you see other people doing.