An Urban's Rural View

The DTN/The Progressive Farmer team was determined to put on an Ag Summit this year that Marcia Zarley Taylor would have been proud of, and I believe we succeeded. Judging from the comments I heard as we left Chicago Dec. 6, this year's Ag Summit, the 11th, lived up to Marcia's high standards.

Marcia created the Ag Summit in 2007 and built it into one of ag's premier events. To the great sorrow of everyone in agriculture who knew her -- and so many in agriculture did -- she died earlier this year at an unfairly young age. (You can see earlier eulogies to her at http://bit.ly/… and http://bit.ly/… ). DTN honored Marcia by naming a lecture series after her and by creating and partially funding a scholarship in her name at her alma mater, Iowa State University. (DTN Editor-in-Chief Greg Horstmeier will be posting information in the Editors' Notebook blog at http://bit.ly/… on how to contribute.)

The 500 farmers and ag professionals who attended the 11th summit were, as in years past, enterprising men and women, the kind who are always on the lookout for opportunities, always eager to learn how their peers from across the country are finding and exploiting new ones. A panel on technology held out hope that farmers will soon get many new opportunities to exploit data more profitably.

Profits figured into another principal theme running through the event -- the sober acknowledgement that profit margins in production agriculture are thin at best these days and likely to remain thin for the foreseeable future. Like the refrain in "Louie, Louie," this annoying but undeniable theme kept playing and replaying. You could hear it in the hallway conversations, in the breakfast roundtable discussions and in several of the presentations.

None of our presenters saw any signs of corn, soybean or wheat prices rising significantly anytime soon. Ending stocks-to-use ratios are high and farmers keep responding to low prices by planting more acres. A "weather event" might offer some relief, according to DTN Senior Analyst Darin Newsom. But DTN Senior Ag Meteorologist Bryce Anderson didn't offer one. He talked instead of a possible sixth straight year of favorable crop weather.

What to do, then? Presenters offered some constructive suggestions on how producers can improve their profit margins. The actionable insights fell into three broad categories:

-- Lock in interest rates. Interest rates are going up. According to two bankers and an economist who made presentations, the most likely scenario is that interest rates will go up slowly and top out at a relatively low level. But with economic growth picking up in the U.S., Europe and Japan, there is at least a chance that inflationary pressures could develop, forcing the Federal Reserve to raise rates more aggressively. Even under the benign scenario, producers will be happier with the rates they get today than what they'll get a year from now.

-- Keep cutting costs. Farmers' costs have come down in recent years, but they haven't come down as much as farm gate prices, according to presenters Steve Allard of Farm Credit Mid-America and Curt Hudnutt of Rabo AgriFinance. That's pinched profits and forced farmers to deplete working capital. Costs of inputs like seed and chemicals "have given all they're going to give," Hudnutt said. To restore profitability, then, the two agreed, farmers should budget to reduce land costs to 30% to 35% of the value of their crop and equipment costs to 15% to 18%. This may mean offloading acres and equipment, they conceded, but slimming down for a time might be a smart tactic.

-- Explore alternatives. Commodity production is a low-profit game, the bankers argued. Normal profit margins are 4% to 5%. That many farmers today would be happy for margins that good doesn't mean the norm is desirable. The bankers urged producers to consider growing non-GMO, organic or other non-commodity crops, or diversifying their operations in other ways. They acknowledged that the mere mention of non-GMO and organic rubs many farmers the wrong way. But it's what consumers demand that ultimately matters. Farmers, they said, should put aside their political views and consider what's best for their businesses.

If this sounds dire, rest assured that the mood at the summit wasn't downbeat -- far from it. This is not the 1980s, more than one speaker pointed out. Yes, farmers' debt-to-asset ratio has risen to 12.5% from a low during the boom years around 9%. But in the ag depression of the 1980s it reached 23%. We're not facing that kind of catastrophe today. What the times call for is not pessimism but realism -- a recognition that if normal profit margins are only 4% or 5%, even one additional percentage point can be important, so let's talk about how to capture it.

It was fitting, I thought, that the most optimistic presenter at the Ag Summit was the first speaker in the Marcia Zarley Taylor Memorial Lecture Series, IHS Markit's Chief Economist, Nariman Behravesh. He sees pickups ahead in industrial production, global and U.S. economic growth and world trade. And while in the past such pickups have not always benefited the ag economy, Behravesh thinks this time will be different. Indeed, he titled his presentation, "The Best Global Growth Since 2011 Is Good News for Agricultural Markets." It would be a fitting tribute to Marcia, who wanted so much to see farmers do well, if Behravesh turns out to be right.

Urban Lehner can be reached at urbanize@gmail.com

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