Nebraska Land Manager

It’s no secret to farmers and landowners that current farm economics are tough. Profit margins are tight this growing season, and myriad reports corroborate this fact. From 2011-14, US farm income experienced a golden period, driven by good commodity prices and strong exports.

Now, according to the Congressional Research Service’s 2016 Farm Income Outlook, it is projected that exports are set to be 6 percent lower from 2015 and well below 2014’s record $152.5 billion, a fact attributed to a strengthening US dollar and weakening economies in several major foreign import countries, including China.

The report also found that national net farm income is also projected to be down—$54.8 billion in 2016—a 3 percent decline from last year. This means that US farm incomes, a key indicator of US farm well-being, will be the lowest since 2002, and is the third year in a row that farms have experienced a decline.

As Nebraska farmers and landowners can attest, land values comprise a significant portion of a farm’s asset base. As such, a change in farmland values is an important gauge of a farm’s finances. Naturally, lower farm incomes mean lower land values, and in this way, the report found that overall farm wealth is likewise set to decline for the second straight year, about 2 percent from 2015.

In this way, reports have found that farmland values of both non-irrigated and irrigated cropland decreased 4 and 2 percent respectively, from 2015. It is expected that cash rents, too, will decrease in 2016, this according to the University of Illinois’ Gary Schnitkey

“However,” Schnitkey says, “projected rent decreases are not large enough to cause farmers to have positive returns in 2016 given current projections of commodity prices and costs. The lagged relationship between returns and cash rents still exists.”

While the outlook is most certainly a pessimistic one, there is always a small silver lining—a mild decline of 3 percent in farm cash expenses in 2016 is expected. Government payments from the 2014 farm bill in the form of revenue support programs are also expected to trigger payments upwards of $9 billion in 2016.

Overall, though, farmers are resilient. Paul Pittman, CEO of Farmland Partners Inc. says that, as tight as things are getting, “Farmers won’t see the same kind of economic crisis they did in the 1980s.” After years of high prices, and only very slight increases in interest rates, most farms in the US are in better financial shape in which to weather the storm.

In summary, the reasons for the tough times are many—production outpacing consumption, a strong US dollar’s effects on exports, lower commodity prices, and a drop in land values—but all boil down to the fundamentals of supply and demand. In a world with a growing population, people must eat, and farmers optimistically hope to weather through this storm until the scale tips in their favor once again.  The recent uptick in soybean prices is a positive sign and corn is trending upward as well.  The summer weather is the wildcard that no one can predict for sure.

Sources consulted:  Bjerga, Alan. “The Crop Surplus is Bad News for America’s Farms.” Bloomberg. 11 Jan. 2016. Web. 23 May 2016.  Schnepf, Randy. “US Farm Income Outlook for 2016.” Congressional Research Service. 16 Feb. 2016. Web. 23 May 2016. Wright, Kevin. “Tightening in the Ag Belt.” Federal Reserve Bank of Kansas City. Spring 2016. Web. 23 May 2016.

Oil prices and Nebraska farmers

Remember when crude oil was around $150 a barrel, around 8 years ago? Most people do, especially if you had to fill up a tank of fuel in your car or tractor.
enjoy a complex relationship with the price of oil, and now, with oil prices vastly lower—under $30 a barrel earlier this week—farmers are examining how low prices at the pump will affect their farming operations.

Most obviously, lower fuel costs mean lower fuel input costs for farmers, many of whom contract their diesel prices in December and January. Most farmers can expect lower chemical costs in petroleum-based fertilizers, pesticides, and herbicides as a result of low oil prices, as well, though these effects may take longer to materialize.

Unfortunately, and against common assumptions, cheap oil ultimately means cheaper commodities, as well as lower prices for farmland. Corn is the most directly affected agricultural commodity when oil prices fall. Ag economist Andrew Wood agrees that, over all, cheap oil is not favorable for those in the agricultural sector when it comes to commodity prices.

“The correlation between oil and agriculture commodity prices (the two broadly rise and fall in tandem based on a multitude of factors, including energy consumption in farming and the use of feedstocks for biofuels) means that production cost savings are likely to be offset by reduced sales revenues, leaving the average producer facing greater challenges in raising finance and unable to lift its margins in a low-cost climate.”

Cheaper oil also means that ethanol is less attractive at the pump. In many areas, people are noticing that the price per gallon of E-85 is the same as—and sometimes even slightly higher—than its regular unleaded counterparts. This leads to a general scaling back on ethanol producers, leading to less demand for corn. Gasoline and ethanol are competing energy sources, so when gas prices fall, ethanol prices drop to remain competitive, say farm economists. That squeezes income at ethanol plants, reducing how much the facility pays for a bushel of corn.

Fuel blenders have been able to add 10% ethanol to gasoline as a relatively inexpensive source of octane. Now that advantage is disappearing, leading to tighter margins for the ethanol industry, and affecting corn prices along the way.

On the other hand, cheap oil and falling land prices may be an opportunity for farmers, especially young farmers looking to increase their acres. Experts and experienced farmers know, too, that the markets are cyclical, and that patience will serve them well in the long run, when the price of crude makes a comeback in the future.

In the meantime, ag producers should continue to keep an eye on their margins, and look to taking advantage of lower input costs and diesel as a result of low oil prices in the coming year. Placing and emphasis on increasing productivity and efficiency each growing season is integral.

Are you concerned about how continued low oil prices will affect your farming operation? Feel free to contact an experienced UFARM representative. We are glad to help you find ways to maximize your profit.

Sources consulted:

Caldwell, Jeff. “Pros and Cons of Sliding Oil Prices for Farmers.” Meredith AgriMedia. 03 Dec. 2014. Web. 28 Jan. 2016.

Doering, Christopher. “Falling Fuel Prices a Mixed Blessing for Farmers.” The Des Moines Register. Des Moines Register. 14 Dec. 2014. Web. 28 Jan. 2016.

Wood, Andrew. “Low Oil Prices—What do they mean for Agriculture?” Norton Rose Norton Rose Fulbright. Mar. 2015. Web. 28 Jan. 2016.