Profit margins in grain production have become razor thin. The competition among producers to acquire land, either through purchase or renting, has never been higher. One good decision can make you a bundle and one bad decision can put you behind the eight ball for years.
In the next few months many of you will be faced with more significant decisions than you've had to make in several years. Let's briefly review some of the key issues corn and soybean producers are facing this winter and some of the facts you should take into consideration.
- World Trade And Farm Programs
This is an area you really can't do much about, but key decisions will be made in the next few months that are going to impact production agriculture for the next several years. Key world trade talks are going to take place Dec. 13-18 in Hong Kong to discuss agreements needed on agriculture as well as other industrial tariffs. The U.S. has already thrown a proposal on the table offering a 60% reduction in a range of domestic farm subsidies if the European Union will reduce subsidies and allow greater access to its agricultural markets through higher quotas on farm imports and lower tariffs.
As you might guess, this is a double-edged sword. This would be good for exports, but I think you may say goodbye to the LDP program. Additionally, the U.S. is under tremendous pressure to lower cotton subsidies because the rest of the world accuses us of artificially supporting world cotton prices.
Changes are coming. You can bet the next farm bill will result in lower government checks, but at the same time we could see an increase in grain exports that will help support prices.
- Energy Costs
High energy costs have put a squeeze on everyone. The good news is that energy prices, like other commodities, are cyclical. What has happened is very reminiscent of the mid-1970s when everyone was convinced energy prices were never going down again, causing Detroit to build smaller and more efficient automobiles. But as we've said before, “the laws of economics have not been repealed.” Building more efficient vehicles resulted in less energy usage and a subsequent sharp drop in energy prices.
In this cycle, energy prices may not drop as much as they did in the 1970s, but the odds are you've seen the highest oil prices you will witness for the next several years. Production will increase, usage will decline and the result will be lower fuel prices. Unfortunately, it's unlikely we'll get back to the days of $25/barrel oil, but $40-45 oil is certainly possible.
- Land Values
Another issue on everyone's minds this winter will be where land values and cash rents are headed.
I'm in the camp that believes non-ag real estate peaked this spring and will show some modest declines over the next several months. The market became overheated and the final speculative surge to the upside was a blow-off top.
It's possible that farmland values have done the same thing. Whenever you start hearing comments that “land prices can't go down,” I'm concerned.
I agree that land prices can't go down like they did in the 1980s because debt levels then were high and they're almost non-existent now. But that doesn't rule out the possibility that land prices in some selected areas could drop by 5-10% if someone needs to move property.
On the other hand, it's unlikely cash rents will decline. In fact, they may go up this coming year. Why? Producers who had good crops this past year and were aggressive forward sellers had one of the best years ever financially.
- Ethanol Production
With the surge in energy prices, many of you have financially benefited from investments in ethanol plants.
As a long-term supporter of ethanol plants, I believe they're good investments. However, keep in mind that whenever anyone “knows” that investing in anything (ethanol plants in this case) is a sure deal, be cautious. This is an area that's going to witness some ups followed by some significant downs.
Be financially capable of weathering some storms before you invest a large percentage of your assets in a business where you have relatively little control.
Proper business planning and strategies this winter are going to be more important than ever. A changing world, which is resulting in volatile commodity and energy prices, will be an opportunity for farmers willing to study and understand the changes that are taking place.
Studying and understanding, however, will not be enough. As I've said before, having the right information and advice is worthless if you do nothing about it. You need a plan of implementation and follow through to take advantage of the current trends.
These will be fun months ahead.
Richard A. Brock is president of Brock Associates, a farm market advisory firm, and publisher of The Brock Report. For a trial subscription and information on Brock services, call 800-558-3431 or visit www.brockreport.com.