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Tough times for Red River farms

Tough times for Red River farms

Record high net farm income in 2012 plummeted by 88% in 2013 and then by 79% in 2014.

There has been a dramatic change in the economic environment of Red River Valley agriculture, as documented by Farm Business Management Program reports from 230 farms in North Dakota and Minnesota during the 2012 to 2014 period.

These farms, which averaged 1,745 crop acres, saw a record high net farm income in 2012 plummet by 88% in 2013 to $61,749 and then by 79% in 2014 to $12,723.

A farmer plants soybeans in the Red River Valley, where farmers have experienced a dramatically dropped in income since 2012.

Not all farms fared equally. In 2014, the net farm income of the most profitable 20% of farms averaged $323,018 on 2,209 crop acres per farm. However, there were large losses, averaging $100,631, for the 20% least profitable farms. The low-profit farms were slightly larger, averaging 2,282 crop acres. The remaining 60% of farms, which represent the middle profit group, averaged $14,243 net farm income on 1,408 crop acres.

What caused the dramatic reduction in farm profit?

“The standard answer is a drop in grain prices,” says Andrew Swenson, North Dakota State University farm management specialist. “North Dakota average prices per bushel for the marketing years of 2012, 2013 and 2014 (estimated) for corn were $6.46, $3.91 and $3.30, respectively. For soybeans, the price per bushel was $14 in 2012, $12.40 in 2013 and $9.40 in 2014. The per-bushel price for spring wheat was $8.15 in 2012, $6.50 in 2013 and $5.45 in 2014.”

However, 2014 prices were higher than in 2009 and every year prior to 2007. A major concern are costs, which have escalated greatly with the advent of historically high crop prices starting in 2007.

Total costs per acre have doubled in the last decade. Using corn production in the Red River Valley as an example, the per-acre cost of seed went from $42 in 2005 to $101 in 2014, and expenditures on fertilizer increased from $56 to $139 per acre during the same period. Total corn production costs per acre on cash-rented land went from $306 in 2005 to $647 in 2014.

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“The combination of lower grain prices and stubbornly high production costs caused net return per acre on cash-rented ground to drop sharply in 2013 and continue downward in 2014,” Swenson says.

In the Red River Valley, net return per acre on cash-rented land for soybeans was $213 in 2012, $79 in 2013 and $6 in 2014. Despite record yields the past two years, wheat dropped from $135 in 2012 to $30 in 2013 and a negative $28 in 2014. Corn went from $331 in profit to losses of $62 and $77 per acre through the past three years. Sugar beets also experienced a similar trend, going from a strong profit to significant losses.

The impact of declining prices is not limited to the net returns on crops grown. It also reduces the value of grain inventory held over from the previous year or years. This has a negative effect on a farm’s accrual adjusted net income and net worth.

The value of grain inventories on Red River Valley farms had grown sharply from 2005 to 2012 because of rising prices and/or greater quantities of grain being held. The inventory value average in 2005 was $225,864 but increased to $758,158 by 2012. Farm profit was strong during the 2007 to 2012 period, lessening the necessity to sell grain. Also, keeping grain in the bin was a way to defer income taxes.

However, there has been a downward trend the past few years because declining grain prices held in inventory are a cause of lower ending grain inventory values per farm. Inventory values in 2013 were $559,885 but dropped to $484,926 in 2014.

“The profit challenge continues for Red River Valley farms in 2015,” Swenson says. “Crop prices continue to be soft, with soybeans, the one major crop which had a profit in 2014, showing the greatest decline. Some costs are weakening, but total costs remain high.”

Source: NDSU Extension

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