by Ken Root
In five decades of reporting on agriculture and rural America, I have seen farmers ride the escalator of optimism and then plunge into the abyss, time after time. It is a herd mentality that apparently still exists even though the herd is much smaller. Every farm owner who makes the majority of income from commodity sales could be seated in a small college football stadium. That should be a source of strength, not weakness. But the incredible investment controlled by this group has not yet given any assurance they can control their own destiny.
Lenders, whose numbers may be larger than those of farmers, are still the most influential factor in dictating the actions, and resulting mood, of the industry. Last week a survey of lender attitudes toward farming was published Creighton University. It is called their ?Rural Mainstreet Index?. It is a monthly survey of bank CEOs in rural areas of a 10-state region dependent on agriculture and energy. Overall The Rural Mainstreet Index, which ranges between 0 and 100, sank in January to 34.8 from December?s 41.5. Index coordinator Ernie Goss said recent declines are the result of lower agriculture and energy commodity prices, noting prices for farm products have fallen by approximately 15 percent, and for fuels by roughly 20 percent. The farmland and ranchland-price index for January sank to 23.9 from December?s 28.8. The January farm equipment-sales index plummeted to a record low 7.0 from December?s record low 8.8.
The classic extreme of the last eighty years was the uptrend in the 1970?s when the Soviet Union made a large and unexpected purchase of corn and wheat from the United States and other exporting countries. Every action fueled a reaction and prices zoomed up until mid-decade when some farmers were already in trouble. The reaction against tumbling prices was the American Agriculture Movement and its tractorcade to Washington, D.C. Many farmers did well until 1979 but then saw a change in government policy which spiked interest rates and took away asset inflation that many farmers had been living on for the past five years. Attitudes changed from exuberant to angry and then to resignation. We entered a downtrend in 1981 that drained billions of equity out of rural America and set up an outmigration which has yet to reverse itself. Finally, in 1988, the values stabilized and the modern generation of farmers began to work their way back to profitability.
Every uptrend and downtrend in agriculture brings out the best and worst in people. Many who over-extended in the 1970?s put themselves out of business in the 1980?s. Others determined they would not be the last generation of their family to farm so they took outside jobs and made financial sacrifices to stay. The era took its toll both in economic and social terms. Be it bad or good, most farmers of consequence today have never been through such a period. What the current generation does in the next three years will challenge their character as much as their holdings.
The issue of supply and demand always comes to the forefront. Farmers, given a chance to make a profit, will produce as much of a commodity as possible. The ability to expand production is one of the greatest strengths of western civilization but also they key factor in decline of farm income when supply exceeds demand and prices tumble. Mother Nature usually gets farmers out of their oversupply crisis but normal weather will eventually allow the next cycle of overproduction.
This is where some common sense reasoning should rise to meet reality. What if farmers were to plant seed that is less productive than the elite hybrids and improved varieties of today? Seed companies might actually benefit from a reduction in production in the long run. At this point, however, there is no ?long run? on any product as quarterly earnings rule investment decisions. But the concept of growing a proven number or a faithful variety of the last decade still intrigues me. A grower could put the same amount of effort into the job and use the same equipment to plant and harvest but the outcome would be about ten percent less (in a normal year). The result would be a reduction in carryover and higher prices on the short term. Is that price fixing? Is that collusion to alter the outcome? Does anyone really get hurt from a rollback of technological advancement at a time of oversupply and equity loss? The ability to ramp up production in the following season would still be in the bag when the market signals and the banker nods.
Sink or swim???..it?s your choice.
