Wall Street Journal: Glory Days Fade for US Farmers

Ok I'll have to take "discredit" for some predictions such as the continuing glory days for US farmers. It looks like times are even becoming tough(er) down on the farm; although I suppose it is all relative. Many are coming off historic boom times and cash flush, so a slowdown from that level would still be positive versus where many in other industries are coming from.

However there are still some interesting comments in here that overlay our comments from the previous year - namely the global competition for resources. Thus far, fertilizer prices (more so) and equipment prices (less so) have not fallen much as farmers worldwide are competing for the same pool of resources. Maybe this will change but it seems hard to believe that as global population grows people will cut back on food in aggregrate. So we have a precursor for a problem I believe will accelerate in the decade ahead - squeezed margins as a limited pool of resources is demanded by multiple global customers. During flush times in the global economy this should be our standard path as too many humans scurry for resources - much of that resource demand is however economically dependent (copper, oil), but food? You'd think not so much (but it hasn't helped the stocks in the agriculture sector from being destroyed). What will be interesting is to see is this demand pressure continues in agriculture despite the global slowdown. We'll know better a year from now.

• The Farm Belt, one of the hottest parts of the U.S. economy in recent years, is rapidly cooling. The Midwest faces plunging crop prices and stubbornly high production costs. Corn prices have dropped from $7.54 a bushel around July Fourth in central Iowa to just $3.81 a bushel on Tuesday. But growers are hearing from suppliers that fertilizer and seed costs could rise by more than 40% each for next spring's plantings. Some farmers are postponing equipment purchases and considering whether to plant less of such high-cost crops as corn come spring. (hmm, that's going to be a problem for our great corn ethanol boondoggle... err push)

• Many Midwest farmers worry that the combination of lower crop prices and high costs will usher to an end, by next year, one of the most flush periods in American farm history. This year, the U.S. Agriculture Department is predicting that U.S. net farm income will hit $95.7 billion, up 10.3% from last year's $86.8 billion and nearly double the $58 billion of two years ago. Annual U.S. farmer profits bumped around between $40 billion and $60 billion for seven years until 2004, when they rose to $85.8 billion. Now, farmers fear a big drop in next year's profits. Most economists figure the Farm Belt can weather a slowdown, partly because farmer balance sheets are strong, and partly because federal mandates will increase the amount of corn consumed to make ethanol fuel next year. Also, economists think global demand for U.S. crops will remain robust despite recent economic troubles.

• The uncertain outlook already is expected to cool demand for Midwest farmland, where prices have jumped by double-digit percentages for four consecutive years. In June, a piece of McDonough, Ill., farmland sold for $7,750 an acre, just 20 months after the seller had paid $4,700 for it.

• Prices of corn and soybeans, the nation's two biggest crops, have dropped by half since early July, when fears eased that Midwest floods had reduced the potential size of crops.

• For many growers, their breakeven costs have climbed so high that they could lose money next year even if crop prices are above the levels long thought to be too strong to warrant subsidy checks from the U.S. government. Farm trade groups and Farm Belt politicians already are pressing the Bush administration to interpret the newly adopted five-year farm bill generously.

• Lower corn prices help ethanol producers, because corn represents about 75% of their costs. But the falling price of crude oil has depressed the price at which the companies can sell ethanol, which competes with gasoline. The ethanol industry's 50% profit margins of four years ago, which helped ignite a plant-building boom across the Midwest, have shrunk to less than 5% at many companies. New construction projects are being halted.

• Economist David Oppedahl at the Federal Reserve Bank of Chicago says farmers have unusually strong balance sheets. The debt-to-assets ratio of the farm sector is just 9%, down from its peak in 1985 of 22%. While many urban families heavily leveraged themselves to buy homes in recent years, many farmers were still so debt-adverse that they bought land with cash or made big down payments.