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    Best Farm Economy Since 1970s Comes With Expense Risk

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    sang_garuda
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    Best Farm Economy Since 1970s Comes With Expense Risk

    Post by sang_garuda on Thu Aug 28, 2008 8:18 am

    U.S. agricultural income is the highest in three decades after corn and soybeans rose to records. The risk for farmers is that costs are rising even faster, increasing concern of a profit squeeze.

    A U.S. Department of Agriculture report tomorrow may show costs are accelerating as revenue growth slows, similar to a pattern that led to a 1980s farm crisis that was the worst since the Great Depression, said Gary Schnitkey, a University of Illinois farm economist. Corn, wheat and soybean prices are all at least 18 percent below their peaks.

    Fertilizer costs doubled from a year ago, while fuel increased 62 percent, USDA data show. Expenses probably will surpass the $279.2 billion that the USDA estimated in February, eroding net income the government pegged at a record $92.3 billion for 2008, farmers and economists said.

    ``Income peaked this year,'' said Kurt Line, who owns or manages more than 6,800 acres of farmland near Momence, Illinois. ``We should see a significant drop in 2009. For the number of dollars we will be risking the next two years, profit margins are not going to be robust.''

    Total farm income, a broad measure of revenue, rents, government aid and other benefits from agricultural operations, will be $371.5 billion this year, according to USDA estimates in February that will be revised in tomorrow's report. Adjusted for inflation, the figure is the highest since 1979. The USDA's first forecast of 2009 farm income will be made in November.

    Sputtering Prices

    While income is up from last year, the price rally that began in 2006 for the nation's biggest crops has sputtered since late June and early July, on signs that Midwest flooding may have caused less damage to corn and soybean plants than analysts had predicted.

    Corn, the most-valuable U.S. crop at a record $52.1 billion last year, dropped 26 percent from its June 27 peak of $7.9925 a bushel on the Chicago Board of Trade. Soybeans, after jumping 78 percent in 2007, plunged 18 percent from a high of $16.3675 a bushel on July 3. Wheat, up 77 percent in 2007, slumped 37 percent from its record $13.4925 a bushel March 12.

    Growers will probably spend one-third more to plant their fields next year, Schnitkey estimated.

    Fertilizer, the second-biggest expense for corn and soybean farmers after land, is tied to spiraling energy costs, said Bob Young, chief economist for the American Farm Bureau Federation.

    ``It will take $5 corn next year just to break even,'' said Young, who represents the largest U.S. farmer group. ``People think they're standing at the edge of a chasm.''

    Corn, Farm Equipment

    Corn futures for December delivery closed at $5.94 a bushel on Aug. 26 on the CBOT, and the price of grain for delivery a year later fetched $6.31.

    The lower price outlook may trim funds available for purchasing new farm equipment, threatening a two-year jump in sales for agricultural manufacturers, Young said.

    Moline, Illinois-based Deere, the largest U.S. maker of farm equipment, said Aug. 13 agricultural sales in the U.S. and Canada will rise up to 25 percent this year. No. 2 supplier Agco Corp., based in Duluth, Georgia, said July 29 that second- quarter North American machinery sales increased 36 percent.

    Deere said it will raise prices for large, wheeled tractors by as much as 7 percent and combines by as much as 10.5 percent next year to cover rising materials costs. Spokesman Kenneth Golden declined to comment further.

    Diesel fuel is up 46 percent in the past year at $4.283 a gallon on Aug. 25, according to the American Automobile Association.

    Decade of Woe

    Ammonium used as fertilizer sold out at $750 a ton for the rest of this year is now being sold at $1,000 a ton next year, said John Lipinski, chief executive officer of CVR Energy Inc., an oil refiner and fertilizer company based in Sugar Land, Texas, during a conference call with investors Aug. 13.

    Falling crop prices coupled with higher costs would create a situation similar to 1980, when expenses fell 1 percent while income fell 9.2 percent, Agriculture Secretary Ed Schafer said Aug. 6. Adjusted for inflation, farm profits fell 46 percent, beginning a decade in which annual agricultural net income averaged less than half what it was in the previous 10 years, according to USDA data.

    ``We don't want to get into a situation in which farmers are squeezed,'' Schafer said.

    Less Debt

    What may help this time around is that many farmers have less debt than they did three decades ago, the American Farm Bureau's Young said.

    Farmer debt-to-equity and debt-to-asset ratios are both at their lowest levels since statistics began being kept in 1960, although the data doesn't adequately reflect the finances of farmers who rent land, Young said.

    For Line, the 34-year-old Illinois grower, the possible decline of the farm boom means tougher times may lie ahead.

    ``2008 is going to be a windfall profit if you bought your inputs ahead and made some forward sales to lock in high prices,'' Line said. ``2009 should be back into fair profits with the cost surge, and if commodities prices stay high. But 2010 will be the year of survival.''


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