We asked three experts to offer their thoughts on what’s in store for agriculture in 2012, and how producers can best take advantage of industry trends.
Will good prices for corn and soybeans translate into profitability?
Boehlje: High futures prices indicate a profit for commodities. It might be a good time to take advantage of futures markets to lock in these prices. What’s unknown is whether supply will balance with demand. If we continue to have a short supply, prices will continue to be strong. But rebuilding stocks will result in lower prices. Remember, a short crop has a long tail.
Henderson: Crop producers should enjoy strong profits in 2011, and if price levels are maintained over the next year, they should enjoy another year of strong profitability. The question for 2012 is, while crop producers may lock in current prices on the revenue side, how will they manage rising costs? Seed, fertilizer and fuel costs increased dramatically in 2011. The risk in 2012 is that higher prices will trim margins.
Oldvader: Today’s prices do not always convert into tomorrow’s profits. Profits come from positive margins. Limited stock carryover, plus reduced domestic production, multiplied by robust domestic and foreign demand, equals bull markets for major grains. Key variables that could tether this bull include the dollar’s value, export demand, trade agreements and sovereign debt outcomes. .... story continued.....
Will the livestock industry continue to face high feed costs?
Boehlje: In some areas, you can’t get forage at any price, and producers are liquidating herds. Beef is expected to attract decent prices for those who have anything to sell. Poultry and pork have the potential for profits in the first part of 2012. Later in the year, pork is more likely to only break even. The big unknown is the economy. If we see another recession in the U.S., it will likely become global. If so, domestic and export demand will pull back.
Henderson: Higher feed costs will trim livestock margins. While hog, beef and milk prices increased substantially in 2011, feed costs rose more dramatically. 2012 profits will depend upon global demand for protein, which will be shaped by economic conditions in the U.S. and emerging nations.
Oldvader: The livestock sector will not fare as well as its crop counterpart, but hopefully the experience will be much better than in 2009. Margins will be reduced by higher feed costs. Even now, the impact is beginning to register on the bottom line for many producers. Unlike 2009, however, global demand for animal protein is rising, which should help maintain some black ink. Additionally, recent weather extremes shaved the size of livestock and dairy herds, which favors higher prices. The current economy will make rising food prices more discernible in the supermarket—look for consumers to move down the food chain with meat purchases.
What’s happening with farmland values?
Boehlje: In Indiana and Iowa, we’re seeing record values as a result of continuing high profits on the grain side, along with continued low interest rates. These trends may continue for 2012 and 2013, but when you buy land, you need to worry about what will happen five to 10 years from now. It’s highly unlikely that these trends are permanent—don’t become too exuberant about purchasing land.
Henderson: Farmland values are rising at a record pace—20 to 25 percent above year-ago levels. Farmers are purchasing most land. Non-farm investors are exploring the option but appear hesitant.
Oldvader: Strong grain prices continue to boost cropland values while pasture tract values have been more lethargic. Our most recent benchmark farm study for the past year revealed that better cropland increased on average 9.3 percent in our 102-county lending area, while pasture tracts decreased by 2.4 percent. The market continues to discriminate based on projected returns, but no land is deflation-proof. Farmers are purchasing most of the high-end land, with a large number of sales in cash. With low interest rates, minimal options for safe alternative investments, and positive crop margins, productive land will be in demand while marginal land prices remain volatile. Beware of prophets proclaiming, “They’re not making any more land.”
How has volatile weather affected farm profits in our region?
Boehlje: Weather’s been a big player. In 2011, wet weather had a negative effect on the ability of farmers in the eastern Corn Belt to put in a crop. In the western Corn Belt, spring weather wasn’t a big problem. But in most of the Corn Belt, hot summer nights in July and August took away yields. In the South, the drought impacted pasture.
Henderson: Unusual weather patterns shaped profitability across the Great Plains. Severe drought slashed crop production in some states, where most income will come from crop insurance. Ample rains in the north Plains led to high crop yields, outside of flooded areas. Regions with bumper crops will enjoy strong profits as they sell into a bullish market.
Oldvader: Mother Nature left her footprint on the ledgers of many producers throughout Missouri. Floods, storms, tornados and drought played havoc throughout 2011. Crop yields in many areas were adversely impacted and livestock conditions deteriorated from extreme heat, drought-stricken pastures and reduced hay production. While higher prices and crop/livestock insurance may soften the loss, I anticipate most net farm incomes to drop from 2010 levels. The past year reinforces the need for proactive risk management strategies.
Is farm debt still declining?
Boehlje: We’re only seeing a 10 percent leverage ratio overall for the ag sector. But that number masks pockets of problems among livestock and younger farmers. We’ve seen significant losses in dairy and pork, where some producers borrowed to cover losses, and their equity values declined as well. Some younger farmers face a 30 percent debt-to-asset ratio. Higher leveraged producers should work to pay down debt now—don’t wait until the interest rate goes up.
Henderson: Farm loan repayment rates remain strong, and farmers are in strong financial condition. Farm debt is starting to edge up. In the fourth quarter of 2010, farmers used their strong incomes to purchase farm machinery—tractors, combines, pivot irrigation systems. Loans for operating purposes rebounded along with rising input costs in the summer of 2011.
Oldvader: Preliminary USDA figures project farm debt to fall from approximately $247 billion in 2010 to $242 billion in 2011—a 2 percent decrease. During the past year, with increased earnings and limited alternative investments, farmers wisely used some cash liquidity to pay down debt. I anticipate that we will see farm debt level out in 2012 and begin a slight increase as producers recover from lower margins and reduced earnings. Farm solvency position remains strong with a 10.4 percent debt-to-asset ratio.
Can producers access credit?
Boehlje: Credit’s generally readily available for grain farmers, but they don’t need as much debt. They’re using more cash to purchase inputs. Livestock producers need more cash to purchase feed. They’re in a poor collateral position, and they’ll likely encounter some problems. Those who produce their own feed are in better shape. Lenders appear to have taken a long-term approach for dairy and pork—given asset values in these segments, lenders would lose more by foreclosing than by taking a wait and see attitude.
Henderson: Producers continue to access the credit they need. Commercial banks report ample funds available for qualified borrowers at low interest rates. Producers in sectors struggling with profits would have more difficulty.
Oldvader: Agriculture remains strong, and credit remains available for creditworthy borrowers. Less-than-stellar credits may require additional collateral or shorter maturities. The cost of money continues to be a bright spot as the Federal Reserve announced accommodative monetary policies through mid-2013. Changes in the banking industry and global finance have not impacted the ability of most lenders to provide credit to agriculture. The federal budget dilemma could curtail access to a number of loan programs, including USDA guaranteed funding for young, beginning, or low-equity producers. Additionally, subsidies available during economic downturns may be in jeopardy.
How will the dollar affect exports?
Boehlje: The dollar declined in value, but it’s leveling out somewhat lately because of what’s happening in Europe. All currencies are uncertain, but over the long term, the dollar’s expected to continue weakening. A weak dollar benefits exports, but the biggest determining factor for exports will be the potential for a worldwide recession. China’s trying to slow its economy to reduce inflation, and that may have an effect.
Henderson: The dollar’s value is enhancing the competitiveness of U.S. exports, which are expected to reach $135 billion for 2011 after adjusting for inflation. With short global crop inventories, export activity should remain strong over the next year.
Oldvader: U.S. exports are experiencing the three best years in history, and the value of the dollar plays a major role. The current export forecast for fiscal year 2011 is $22 billion higher than the previous record set in 2008. Exports for 2012 will remain equally strong. With the Fed’s current monetary policies, the dollar’s value should continue to favor robust ag exports.
How can farmers better manage risk?
Boehlje: Strong working capital is the first line of defense against financial stress. We’re telling farmers not to worry so much about where to put their cash. Holding liquid cash isn’t typical, but with today’s volatility, this may be the time to do it. All farmers should look at crop insurance—bite the bullet, even though it costs more now. Also, farmers should be more active in forward pricing. Shop around early to price fertilizer. Cash-match commodity selling to input purchasing to protect your cash position.
Henderson: Traditionally, farmers manage risk by bolstering working capital. You can also purchase crop insurance to protect against production risk. More farmers are engaging in hedging, but you need to lock in both the revenue you receive and the cost you incur to solidify your margins.
Oldvader: A number of risk management tools and strategies are available, including yield and revenue insurance, futures and options, contracting sales and purchases, enterprise diversification, debt-level management, credit availability, and off-farm employment. In this environment, a well-defined business plan becomes critical for success. It’s also a good time to lock in interest rates for long-term assets such as land.
How will federal policy affect farmers?
Boehlje: The Conservation Reserve Program may be protected from budget cuts, but direct payment programs are vulnerable. Today, federal payments are responsible for only 10 percent of total farm income. That’s a substantial change over the last decade, when in some years almost a third of farm income came from federal payments. So budget cuts won’t be as painful as in the past.
Henderson: Policy has always shaped agriculture. Budget deficits are increasing the pressure to reduce farm supports in the 2012 Farm Bill. Ethanol and renewable fuels policy is more uncertain as the extension of the blenders’ credit has yet to be determined. Ultimately, ethanol demand is shaped by the Renewable Fuels Standard and any changes in the mandate will shape ethanol profitability.
Oldvader: Washington will have a more pronounced impact on the livelihood and welfare of U.S. farmers. On the other side of the coin, budget woes will dramatically reduce farm subsidies. We are moving into a more highly regulated, less-subsidized farm economy.
What’s your top trend for 2012?
Boehlje: Continued volatility, and continued higher-than-normal levels of operational risk.
Henderson: With historically low inventories, volatility will remain high in the agricultural sector. Macro economic trends will also play a major role in shaping profits. The low value of the dollar and low interest rates will help farm profitability, but any weakness in the global economy or financial market stress could tarnish the golden opportunities in agriculture.
Oldvader: As I write my response, I am looking at a full-page ad in the Wall Street Journal entitled, “Since When Did Agriculture Become a Dirty Word?” As Americans become more in tune with their health and the health of the planet, they’ll continue to challenge farming practices. Equally concerning: few of the folks who promulgate laws and regulations governing our industry have any idea of agriculture’s positive impact on the economy. This issue will come to greater light in the 2012 Farm Bill. We’re doing a better job of communicating as an industry, but we face a tremendous challenge to stay in tune with our audience.
Henderson: While 2012 is most likely to be another year of prosperity for agriculture, high levels of volatility could quickly alter the outlook. Hope for the best and prepare for the worst. Enhance risk management strategies and maintain adequate levels of working capital.
Oldvader: The volatility embedded in today’s environment makes detailed business planning an absolute necessity. Communicate with all stakeholders to reveal income/expense projections, marketing/purchasing strategies, risk management tools, and capital outlays. Review the plan using different assumptions—ask “what if?” The risks are great, but so are the rewards.
Boehlje: Farmers need to be more proactive to reduce their risk.