Farmers buckle up for a bumpy ride as commodity prices fade
With the recent era of high-priced commodities fading in the rearview mirror, Iowa farmers will succeed by controlling costs, increasing efficiency and finding sources of supplemental income, according to Chad Hart, an Iowa State University (ISU) agricultural economist.
"The reality is that the corn and soybean prices we have today are far more likely to be the prices we have for next five years, instead of what we had in the recent run up," Hart said recently at the Iowa Farm Bureau Federation 2016 Economic Summit in West Des Moines. "That’s why managing margins is going to be so critical."
Hart is optimistic that farmers in Iowa and other states can pull through these tougher times once they get a good handle on costs and sharpen their management skills.
"In terms of net worth and debt, we are actually in very good shape," Hart said. "If we can get our cost structures in line, this is a two- or three-year problem," he said. "It’s not a decade-long problem like we saw in the 1980s."
The cost-price squeeze that farmers face today is, in many ways, a direct result of the period of corn prices over $6 per bushel and soybeans above $13 per bushel during the boom years of 2007 through 2012, Hart said. With prices high and profits bulging, farmers spent more on land and land rent, along with equipment, seed genetics and other technology, he said.
"In a certain sense, we let our cost structure get away from us, because we knew that the markets would cover the higher costs."
To get costs back in line with income, Hart said it’s important to determine a realistic cost of production for each bushel of corn or soybeans harvested. "Your cost of production is really something you need to know if you want to find ways to control your spending."
After determining cost of production, farmers need to look hard through their budgets to find savings, the economist said. That includes cost of land (either owned or rented), equipment, seed genetics and all other areas, he said.
The key to success in this new belt-tightening era is searching for ways to reduce costs without hurting production, Hart said. "We need to look all across our businesses to find the areas to save money."
That could mean leasing equipment instead of buying, finding discounts on inputs and throttling back a bit on buying the latest technology in seed genetics, herbicides or other inputs, Hart said.
Farmers also need to look hard at their family living expenses to find ways to economize, Hart noted.
"We got used to, very quickly, living high on the hog, and that will likely have to change," he said. "It’s not that farm families did anything wrong by enjoying some of the profits during the better years. But we can’t expect to keep living that way when the farm economy changes like it did."
Communication is key
Another key to finding savings is working with lenders, tax accountants, crop advisors and others who can help farmers find production cost savings, Hart said. Communication is critical, he said, especially with lenders.
Lenders know that all farmers are feeling financial pressure and want to work with clients to help them through the tougher times by lengthening the terms of loans or finding other cost-saving measures, Hart said. "They want you to succeed because it’s good for them too, so you need to keep up the communication."
In addition, farmers need to carefully consider where they are in their careers in agriculture before they decide to grow their operation by buying or renting additional acres, Hart said.
For some younger farmers, it may be time to wait to see if deals get better in a few years, the economist said. "Younger people may be better off holding back a bit and letting the market come to them," he said.
Others who are in a strong position may find it’s a good time to look for practical ways to expand, Hart said.
"We are going to have some tough decisions ahead on all of these things, but I think the industry will come out strong in the long run," Hart said.
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