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The profound disconnect between revenue and cost

SolStock/iStock/GettyImagesPlus Mature farmer sitting at a table in his house doing paperwork with a coffee and biscuits.
In 2019 controlling costs is not optional. It’s mandatory, and if you don’t think so, just ask your lender.

A brief disclaimer before I go all sky-is-falling on you: there’s no need to panic. U.S. farmers remain financially viable for the most part. Our surveys show as much, despite the dark clouds and panicky barometers that track farmer sentiments.

But things are much different from the glory days a half decade ago. And now they’re getting worse.

To that point, we need to stop comparing today’s economics to those glamorous days when demand-driven grain prices, drought, and crop insurance made many farmers instant millionaires. Mainstream media (and some of us, too, I admit) gravely note that ‘net farm income has dropped to half of what it was five years ago.’ But come on, people. That was once-in-a-lifetime.

And was it really a golden era? Even now I hear wistful comments at farm meetings: “Everything was fine when corn was $7.” It might have been fine short term but look where it led us: almost 10% more global harvested acres, and mountains of unwanted grain as far as the eye can see. Someone should come up with a list of all the new ways we can use the soybeans China no longer buys from us. Wallpaper? Pillow fillings for the “My Pillow” guy? Add some sugar and make Halloween treats? Introduce them to the growing craft brewery industry? “Malt, barley and beans, a time-honored flavor combination!” Instead of rock, chip and seal, how about beans chip and seal for rural roads? You’d have to replace the roads every year, but hey, that’d be a good thing, right?

Sorry for the tirade. Moving on.

Cost disconnect

Clearly production is not an issue of late, thanks to great technology and favorable weather. But for some farms, more bushels won’t solve the problem of growing debt, shrinking margins and vanishing working capital.

“I am continually amazed at the profound disconnect we see now on revenue vs. cost,” says Purdue ag economist Mike Boehlje. “Things could change, but right now, corn is a loser. Soybean is a loser. If you’re in the western corn belt, basis has collapsed. To be very frank, it’s going to be very difficult in 2019, especially with higher input costs.”

The anemic farm economy means tough choices for some farmers. If you’re financially vulnerable, the easy decisions on costs should have already been made. You’ve shed unused, unneeded assets; You’ve refinanced loans for longer terms; You’ve added off-farm income or picked up custom acres.

But for some, even tougher decisions loom. Will I need to give up land to stay in business? Call it quits?

“We can’t continue to lose money without it turning from a bubble to a default,” says Boehlje.

Default is a nasty word. No one wants to see bankruptcies in the country this winter. Yet, think about why the ag boom cycle in the ‘70s ended so badly in the ‘80s. The darkest days of that decade saw about 100,000 family farms technically insolvent, simply because they borrowed too much money at the wrong time. What three factors drove the farm economy into the ground? Bad trade policy, oversupplies, and high interest rates. Right now two of the same three factors are in play.

How nimble are you?

It’s human nature to continue doing things the same year after year. That may be truer in farming where profitability sometimes gets overshadowed by lifestyle. But changes must be made to remain viable. The definition of insanity is doing the same thing over and over and expecting a different result.

Farmers are changing, slowly, if our surveys are any sign. In 2014 we asked farmers to respond yes or no to the statement, “New seed technology for corn has been worth the additional cost on my farm.” Back then two-thirds said yes while one-third said no. When we asked the same question this August, 48% said yes while 52% said no.

Likewise, in 2014 we asked farmers to agree or disagree with the following statement: “I'm ready to stop renting some of the land I farm if rents are too high.” Back then only 51% said they were willing to stop renting expensive land; In 2018 the ‘agree’ answers shot up to 59%.

In 2019 controlling costs – inputs, overhead, and administrative - is not optional. It’s mandatory, and if you don’t think so, just ask your lender.

Remember 10 years ago when we all proclaimed how agriculture was in a ‘new normal’? Well, this is our new normal, and it won’t include $7 corn any time soon. Do what you need to do to survive.

The opinions of the author are not necessarily those of Farm Futures or Farm Progress.

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