The old joke about the lottery-winning farmer – “I guess I’ll just keep farming until it’s gone”—may soon again be funny as an unprecedented era of ag prosperity ends.
Farmers may still be the richest people many of us know, but their seeming license to print money during a seven-year run of record grain prices and near exponential growth in land values has been revoked by falling markets for corn and soybeans.
“I think it’s over. What goes up must come down. It never really felt like it was a new plateau,” said Prairieburg farmer Jim Greif, a district director of the Iowa Corn Growers Association.
“We thought it was coming to an end last year, but the drought delayed it,” said Jamie Schmidt of rural Garner, president elect of the Iowa Pork Producers Association.
“There is no doubt the run-up in prices and buildup in wealth was not sustainable,” said Brian Jones, research and business development manager for Iowa Corn Growers.
“It’s a concern on everybody’s mind. The consensus is we are coming down off the highs and transitioning to a new price level for corn and soybeans,” said Grant Kimberley, director of market development for the Iowa Soybean Association.
For corn, that price level will be in the $4 to $5 per bushel range, said David Miller, director of research and commodity services for the Iowa Farm Bureau.
“Are we going to see $2 to $3 corn? No. Growth in demand and growth in acreage have played out, but demand is still solid,” said Miller, who farms in Lucas County.
During a lengthy national recession that won’t quite quit, the entrepreneurs in seed-corn caps have built new homes, erected giant shiny bins and machine sheds, bought new pickups, tractors and combines at a rate that has propelled Deere and Co. to 13 straight quarters of record profits, expanded their underground labyrinth of drainage tile, buoyed the Iowa economy and watched their principal asset and retirement portfolio appreciate 278 percent from 2000 to 2012.
Over the past seven years, U.S. corn and soybean producers have enjoyed their best run of returns in history, with net farm income peaking at record levels in recent years, according to Iowa State University economist Chad Hart, who, with several ISU colleagues, called attention to the end of the era with a collection of articles on ISU’s Ag Decision Maker website.
Although many farmers had hoped that the era might prove to be the new normal, it was actually just an exceptionally long and lofty up cycle, Hart said.
It would have ended last year, he said, but the worst Midwest drought in 50 years kept grain supplies from catching up with a demand fueled by ethanol production and grain and livestock exports.
This year, with record U.S. corn acreage, expanded production and retreating demand have put “both the projected prices from USDA and the futures prices from the Chicago Board of Trade on a strong downward slide as we look at the 2013 and 2014 crop seasons, moving from $7 corn and $14 soybeans to $4-5 corn and $10-12 soybeans,” Hart said.
After posting record highs the past two years, long-term projections suggest U.S. farm profits will retreat over the next decade, according to a paper published earlier this year by the Federal Reserve Bank of Kansas City.
The USDA projects U.S. net farm incomes to fall between 20 percent and 25 percent below 2013 highs during 2014 and remain near these levels over the next decade, that Federal Reserve paper said.
While farmers tend to break even over the long tern, “we could see a couple of years of losses going forward,” Hart said.
Kimberley said he does not expect grain prices to sink to pre-2007 levels. More likely, he said, are $3 to $6 per bushel for corn and $8 to $13 per bushel for soybeans.
“It will be hard to make any money at those levels,” he said.
Land values will certainly fall, especially as commodity prices fall, ISU economics professor Michael Duffy, the leading expert on land values in Iowa, said in a report posted on the Ag Decision Maker website.
His prediction – “a leveling and then a gradual decline” — was somewhat presaged by the recently released Iowa Realtors Land Institute survey, which showed a statewide increase in the value of tillable land of just 1.2 percent during the past six months.
Unlike the 1970s, when speculation, inflation and high interest rates contributed to a 369 percent run-up in farmland prices from 1971 to 1980, the current golden era has been fueled primarily by record farm income, Duffy said.
Also unlike the 1970s boom, which was followed by a 58 percent decline in Iowa land values from 1982 to 1987, this one will not likely be followed by a bust, he said.
“This time, 78 percent of Iowa land has no debt, and that’s a big difference,” he said.
Though farm prosperity has been widely credited with buoying the Iowa economy during the national recession, state revenue officials say the prospect of declining farm income will not greatly affect state tax revenues.
“If pushed, I would say we need to be cautious, but I have seen nothing in our monthly analyses to suggest alarming drops,” said. David Roederer, director of the state Department of Management and a member of the Revenue Estimating Conference.
“We see the (farm income) plateau, but we are not ready to say it will be greatly negative for state revenue,” said Holly Lyons, director of the Legislative Services Agency’s fiscal services division and a member of the Revenue Estimating Conference.
With lower prices will come a readjustment of the cost curve, according to Kimberley.
Prices farmers pay for farmland rent, seed, fertilizer and other chemicals “will have to come down,” he said.
Farm Bureau’s Miller said Iowa cash rent, averaging $270 per acre statewide for row crop ground, will edge up again next year before farmers start pushing back in 2015. “It’s hard to tell a tale of woe to your landlord after two years of high profits,” he said.
While farmers may extract some concessions on the price of fertilizer, herbicide and pesticide, “I can’t remember the price of seed ever going down,” Miller said.
“It’s obvious we are settling into a lower range of grain prices, which will mean lots of stress for farmers during the next two years as we establish new cost structures,” Kimberley said.
Livestock producers will benefit short term with lower prices for their principal inputs, corn and soybean meal, “but it won’t be a long-term advantage,” said Schmidt, who raises about 20,000 pigs from farrow to finish on his Hancock County farm.
Nevertheless, Schmidt said he remains optimistic because of export potential and domestic demand for meat.
Iowa Soybean Association President Brian Kemp, who raises corn and soybeans near Sibley in northwest Iowa, said he too remains optimistic about “the tremendous potential for overseas demand” for Iowa farmers’ products.
Kemp said Iowa farmers’ recent investments in land, equipment and facilities will help them weather the leaner times ahead.