Is the prosperity of our ag environment fragile?
Today’s good times in our agriculture industry may not last forever, so now is the time to plan for the unexpected.
Agriculture is in a “super-cycle” – and has been for a decade – but don’t be lulled into thinking this is business as usual.
“These are not normal times,” says Michael Boehlje, Purdue University economist. “Don’t think that today and the strength of this industry is forever. At the same time, don’t automatically think it is going to tank, but don’t forget that it can.”
Boehlje’s remarks come on the tail of the USDAEconomic Research Service (ERS) report that estimates that the 2013 farm income will be the second highest in U.S. history. While much of that income was made from crop insurance payments, the year is second only to 1973 when adjusted for inflation.
Agriculture’s greatest vulnerability to fragility is a land price adjustment, something Boehlje says is sure to come. The sky-high land prices this winter have him nervous. Prime farm ground bringing up to $20,000 acre is living proof that there’s a land boom, and that land, he says, is valued at more than twice its earning potential.
“It’s not a question of whether we’re in a land boom. It’s a matter of what will be on the other side – a bust or a soft landing,” Boehlje says. “We could have a soft landing if we stop right now with the climb in land values.”
Two keys to a soft landing are continued strong exports and keeping the mandate for ethanol in place.
None of that changes the fact that land, on average, is 85 percent of the asset base in agriculture. That lopsided net worth makes farmers more fragile than they were in the 1980s.
“We are in unusual times with a lot of volatility,” he says. “I don’t want farmers to be road kill.”
Boehlje also points to farm equity data from USDA-ERS that shows how just one year of $3 corn in 2009 plummeted the national average net worth of farmers. A return to $3 or $4 corn could quickly create financial woes.
Boehlje shares a lineup of factors that make us vulnerable and tips to capitalize on ensuring uncertainty (see below). In addition, he admonishes producers to do a “fragility test” on their own operation – to know where they stand. Being bigger, more specialized and more highly leveraged all increase fragility.
Don’t Get Caught by Surprise
Vulnerabilities to Continued Prosperity:
Land price adjustment
Increased supplies from productivity or acreage increases
Slowdown in demand growth
Higher interest rates
Asset value declines
Weak working capital positions
Excess or poorly structured debt
Availability of credit
Increased tax burdens
Even though times have been good for agriculture, risks remain. Of all the factors economist Michael Boehlje is concerned about, the risk of a land price adjustment tops the list. Too much of farmers’ net wealth and asset base is tied up in land that is overvalued in today’s land boom.
Tips to Capture the
Do not plan for the averages. Instead, position for the tails.
Recognize that increased volatility mandates more focus on risk and management.
Minimize your wrong choices.
Guard working capital.
Make sure you’re in a debt situation that will allow you to capitalize on the fragility of the industry-and your competitors.
Be careful about how much you bid for “blue sky” in land deals.
Recognizing that many farmers are truly entrepreneurs, Boehlje offers these ideas for being ready to take advantage of business opportunities when things turn south for agriculture. To learn more about any of these farm management practices mentioned above or to learn about the just published, 2012 financial numbers for southern Minnesota farmers, contact your local Farm Business Management Instructor.