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Cycling through the downside of a farm economy

Cycling through the downside of a farm economy

Most farmers didn’t need to see the USDA report this week to know the U.S. farm economy has been groaning along for the last 18 months and recently took a dive. The report just quantifies the feelings. Farmers know farm profitability goes in cycles; and they also know this, too, shall pass.

U.S. net farm income peaked in 2013. Since then, it has fallen. U.S. farm net income is down due largely to relatively low prices for row crops, according to the USDA report released Aug. 25.

According to the report, net farm income for 2015 will be $58.3 billion, down 36 percent from 2014’s estimate of $91.1 billion. The 2015 forecast for net farm income is the lowest since 2006, and the lowest since 2002 in inflation-adjusted terms, for a total drop 53 percent from the record high of $123.7 billion in 2013.

People in the ag industry hope the bloody-nose-feeling the sector feels now at least means it has hit the dirty floor of the down cycle, and we can now stagger up, shake off the slip and ready for the ride back up. We’ll see. The good farmers -- the ones who can make the yields and make the best marketing decisions during this down time -- know their business will be better for it when things improve … if they can make it through.

Don Shurley in an excellent analysis of the U.S. cotton market recently lamented farmers’ frustration when making good, timely marketing decisions when prices are down like now.

“A farmer can work all season long to make a good yield and control costs while making a good yield, but then lose profit potential due to pricing and marketing,” he said.

The first step a famer can take down the path to making wiser marketing decisions is to know his cost of production. This sets the benchmark for how much risk a farmer can take, Shurley said.

“If your variable cost of production is 60 cents per pound and the market is at 70 cents, you’ve got a 10-cent cushion.  If the market goes down to 65 cents, you have dug a hole but not as deep a hole compared to someone whose cost was 65 or 70 cents.  It’s all about risk,” Shurley said.

University of Tennessee Extension economist Chuck Danehower, in another well-crafted look at farm profitability, said profitability varies greatly depending on a farmer’s situation.

For example, when looking at profit potential, “Producers who have owned or cash rent ground may be interested most in the returns over variable expenses. The producer then can deduct his cash rent or land payment from what is left to get an idea of profitability before fixed cost are deducted,” Danehower said.

Also, he said, farmers who share rent ground may want to look closely at the returns over variable and land costs then take their own fixed costs out.

“Producers wanting just a general idea of profitability may look just at the net returns, which have variable, land and fixed cost deducted from gross revenue. Looking at that profitability number and the breakeven price needed to cover all expenses at the selling price can aid producers in their marketing plan,” Danehower added.

There is no doubt the U.S. farm economy is going through a down time. How long will this part of the cycle last? Nobody really knows the exact time the momentum will shift and the ride will move upward on higher commodity prices. But ask any successful farmer who takes his marketing seriously, and he’ll say he learns a lot more about managing his business and marketing his crop efficiently and profitably when commodity prices are low.

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