Minding Ag's Business

News So Bad, It's Good

Commodity producers attending this 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 this 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.

With little hope for price rebounds, Zuckerberg and Rabobank's Sterling Liddell believe growers must 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.

P[L1] D[0x0] M[300x250] OOP[F] ADUNIT[] T[]

"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. Bank loans dry up, just as they did after the home mortgage crisis in 2007-2008. Pain causes more disciplined spending, he said.

Inevitably, farmers will be forced to reduce planted acres, Rabobank believes. From the peak of 231 million acres planted to corn, wheat and soybeans in 2014, farmers will need to idle 3 to 4 million acres to get supplies in line with U.S. demand. Poor quality land in North Dakota could head back to the Conservation Reserve Program; more summer fallow could crop up in Kansas; in the Delta, some of the worst land just won't get planted, due to lack of financing, farmers there report.

With the correction in farm machinery well under way, land values also will come under further pressure during 2016 and this [adjustment] could extend over the next five years, the analysts said.

So far, cash rents have barely budged since commodity markets collapsed in 2013. A few producers are walking away from poor quality land or over-priced rents. But one northern Illinois farm even brought $390/acre in an auction two weeks ago, Farm Credit System lenders report. They also tell DTN they see far too many rents in the $350 range, levels they believe are unsustainable. By next fall, with $3.45 or lower corn prices, attitudes could change, however.

"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."

Follow Marcia Taylor on Twitter@MarciaZTaylor

P[L2] D[728x90] M[320x50] OOP[F] ADUNIT[] T[]