NEW ORLEANS (DTN) -- Many producers attending last week's Commodity Classic in New Orleans are feeling the burn of two or three consecutive years of negative incomes. But modest profit margins could return sooner than farmers think if serious cost cutting accelerates, some agricultural lenders say.
U.S. row-crop farmers are going through a painful adjustment period now, but the 2016 crop year could mark the worst of the cost-price squeeze, analysts at Rabobank predicted last week. For the survivors in this business cycle, 2017 is likely to begin a return to modest but more normal profits.
Ken Zuckerberg, a Rabobank senior analyst for farm inputs, isn't forecasting a miraculous rebound in commodity prices. In fact, he's expecting more retirements, farm failures and consolidations in the next year or two. "2016 will be a period of realization and readjustment" for commodity agriculture, he said.
Farm equipment is the first expense affected by tighter budgets, and sharp reductions began in that sector two years ago. With little hope for commodity price rebounds, Zuckerberg and Rabobank's Sterling Liddell believe growers must now succeed in negotiating sizable cuts in cash rents, fertilizer prices and other production expenses. While they doubt seed and chemicals will suffer many cutbacks, the goal is to shave long-term break evens closer to $3.60 to $4.20 corn and $8.30 to $9.60 soybeans.
"Agriculture has gone through a pernicious downturn the past few years -- very sharp and very striking," said Zuckerberg in an interview with DTN. "In business cycles, it's tempting to say it's going to keep being terrible for years to come. Usually at that point of the cycle, bad news becomes good news."
Natural forces take over after consecutive years of severe income drops. Farmers increasingly rely on credit for production loans. Bank loans dry up, just as they did after the home mortgage crisis in 2007-2008. Lenders balk at financing input costs on marginally productive land. Pain causes more disciplined spending, he said.
Inevitably, farmers will be forced to reduce planted acres, the Rabobank analysts believe. From the peak of 231 million acres planted to corn, wheat and soybeans in 2014, farmers will need to idle 3 million to 4 million acres to get supplies in line with U.S. demand. (In parts of the Delta, farmers already tell DTN that landowners of some poor-quality land are still hunting for tenants, even though spring planting is well underway. In parts of North Dakota, some land is headed back to the Conservation Reserve Program. That's an indication that property with a low-yield history can't show a profit at today's prices.
With the correction in farm machinery well underway, land values will come under further pressure during 2016 and this [adjustment] could extend over the next five years, the Rabobank analysts said.
CASH RENTS STILL STUBBORN
Other farm lenders report only modest budget savings to date.
Midwest cash rents have barely budged since commodity markets collapsed in 2013. "Landlords have been largely unwilling to negotiate," said Bill Johnson, CEO of Farm Credit Mid-America, which serves Ohio, Indiana, Tennessee and Kentucky. "It will take some time for rents to adjust." The question for those burning capital in the interim, he added, is how long they can hold out.
Aaron Johnson (no relation to Bill), executive vice president of Farm Credit Illinois, reports a few Illinois producers are walking away from poor-quality land or over-priced rents this March. But he is still seeing some $350-per-acre rents on the highest-class soils for 2016 that are beginning to stress margins. One northern Illinois farm even brought $390 per acre in a private auction two weeks ago, a price he believes is unsustainable.
He doubts paying a premium to take on new rental land makes sense now, if it means you'll lose $150 per acre this season and commodity prices don't improve over the next three to five years, as USDA and others forecast.
That's the attitude adjustment that will be necessary to turn crop production back to profitability.
"Bad things happen to good people, so they need to reinvent and remake themselves," Zuckerberg emphasized. "We've gone through the stages of fear, anger and anxiety. Now we're in the negotiation phase. Capitulation is when you'll see opportunity."
For more discussion of Corn Belt credit conditions, see the related story on the DTN Minding Ag's Business blog.
Marcia Taylor can be reached at firstname.lastname@example.org
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