Food prices rise while farmers’ profits destabilize
Bigger yields, pricier inputs, and more headaches
| As home prices slide, the value of farmland sets records. We trim and meld six 2008 articles: (1) “Higher crop prices followed closely by higher costs and risk” by Gretchen Schlosser in the West Central Tribune of Willmar MN (Jan 28); (2) “Farmland more valuable than ever” by Lynn Hicks and Jerry Perkins in USA Today (Feb 5); (3) “Fertilizer, seed expenses skyrocketing” by Ben Sutherly and Elaine Morris Roberts in the News-Sun of Springfield OH (Jan 14); (4) “Land rent may soar” by Candace Krebs in the AG Journal Online of McPherson KS (Jan 23); (5) “Land value highs and lows: Prime ag land values continue to rise, but there's a flip side called input costs” by Kevin Bonham in the Herald of Grand Forks ND (Jan 27); and (6) “Grain Update: A New Era For Agriculture?” by Bruce A. Babcock in the Iowa Ag Review posted at CattleNetwork (Jan 29). |
by Jeffery J. Smith
February, 2008
Schlosser: While a majority of farmers chose what crop to plant in the spring, about 25% are still undecided. These producers still wait either for the markets or landowners to decide.
The costs of raising corn and soybean, Minnesota’s two biggest cash crops, are rising just as fast, or perhaps even faster, than the prices offered at the local elevator or on futures contracts on the Chicago Board of Trade.
If grain prices back down or there’s another drought or flood, farmers would face a hard future.
Hicks & Perkins: Demand for grain for food, fuel, and export, along with low interest rates and a weakened dollar, have raised farmland prices by double digits the past two years. Average values have doubled since 2000.
Many credit the demand for ethanol but other factors include the low value of the dollar, which makes US exports relatively cheap.
The growth has attracted a tidal wave of investors from individuals to large government and corporate pension funds, insurance companies, hedge funds.
Sutherly & Roberts: Even though corn prices remain high, the input increases offset that gain.
Farmers face significantly higher rents, especially for prime soils, as landowners seek a share of the profits.
Prices for three key chemical fertilizers have soared: from 2006, nitrogen is up 40% while phosphorus and potassium are up 65% and 40%, respectively.
Meanwhile, Mosaic, Potash Corp, and Monsanto enjoy profits that have soared from sales of fertilizer and seed. That demand has been driven in part by ethanol and by advances in farming in places such as China and South America.
There will be more income from higher yields, but that enables farmers to take on more debt for land, equipment, and inputs.
Krebs: A recent 30% boom in futures price in the grain market means returns for cash-rent farmers could skyrocket to more than $200 an acre; the long run average is less than $50 an acre. After cost increases for fertilizer, machinery and rent, the returns to tenants didn't change much. Farm profitability has more to do with costs than with income,
Farmers complain that the land is paid for and the landowner has no costs to cover besides their taxes. Cash rent agreements are low risk for the landowner and high risk for the farmer. A cost-share arrangement between landlord and tenant is now yielding the farmer a lower return than cash rents paid to owners.
While efficient farms exist in all sizes, the averages favor the larger farms. And that effect seems to be snowballing. Farm concentration is aided by new technologies including precision ag, herbicide tolerant seed technology, and no-till.
Bonham: Prime agricultural land is setting records on the auction block. Good farmland generally is selling about 25% higher than a year ago. In some areas, the increase is even greater. Come spring, cash rent prices likely will hit new marks, too. Higher input costs make it increasingly difficult, in many cases impossible, for young people to get started in agriculture.
Babcock: Although we are coming off a record corn harvest, farmers can sell their 2009 and 2010 crops for about the same price.
If these price levels were permanent, the impacts would be staggering. Current prices imply that land rents in Iowa and the rest of the Corn Belt would increase by a factor of about 2.8, even after accounting for the loss of government payments, the higher production costs associated with increased demand for inputs, and increased returns to management and machinery. As land rents go, so too do land prices.
High crop prices dramatically increase the cost of raising hogs, finishing cattle, and producing milk and eggs. These costs will be passed on to retail prices for meat, eggs, and dairy products. Competition for land between specialty crops, oilseeds, and food and feed grains will also increase the prices of products such as hops, barley, beans, and vegetables. Consequently, consumers should expect steeper food prices over the next year or two.
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Also see: The high cost of opening the door to GM crops
Farm Land Values in Danger from GM Crops
Corporate Welfare to Agribusiness -- Government Sets New Record |
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