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Farm Credit Services of Illinois' new website is now available at www.fcsillinois.com. USfarmcredit (this site) continues to be the web site for 1st Farm Credit Services.
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Agricultural Scholarship
Cultivating Master
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Agriculture And The Current Business Environment
“It was the best of times; it was the worst of times.” The opening line from the Charles Dickens novel A Tale of Two Cities seems like a fitting quote to describe the current business environment.
Whether you look at the stark differences between the agriculture economy today and the general U.S. economy, or the strong grain industry or the strained livestock industry, we truly are in an extremely volatile time.
Ag industry versus the U.S. general economy
With its strong increase in the commodity prices for grains, the agriculture industry is one of the shining stars of the U.S. economy. Net farm income in 2007 was the highest ever. With the cheap dollar, agriculture exports are high and will continue to be high for the near future.
The industry is viewed so favorably today that many investors have shifted funds from equity investments into commodities, which has helped push up grain prices. What happens when this money pulls out of commodities and moves back into equities?
Contrast the strength of the agriculture industry to that of the consumer-based U.S. economy, which is closely tied to consumer spending. The crisis in the housing industry is expected to get worse before it improves, and some say it could take at least two years to stabilize.
Consumers’ largest asset, and greatest amount of equity, is their home. As the value of the home declines, consumer spending will also decline. Only those industries with large export markets, or those in oil, are projected to do well in the U.S. economy during the next few years. The economy will be flirting with a recession for the upcoming months.
Grain versus livestock
To date, the government has shown continued support of renewable fuels such as ethanol and bio-diesel from corn and soybeans. The increased demand for U.S. crops and grain has caused prices to move upward. Interest rates are declining, lowering the cost of debt for farmers. These higher and more volatile grain prices have begun to change how farmers can market their crops, especially if they decide to price future years’ crops.
More and more grain elevators that carried the risk of forward pricing future grain sales are beginning to limit this practice, which moves the marketing risk to grain producers. Another factor is increasing input costs for fuel, fertilizer, seed and land. In some cases, these costs are growing faster than commodity prices.
Where grain prices and input costs finally settle will determine if profitability will last or decline for grain operations. Strong prices for corn, soybeans and wheat present opportunities for many grain farmers to have strong income levels for upcoming years. However, increased volatility comes with increased risks, which if not managed, can take a good operation down.
The strength in grain prices created serious problems for livestock producers. Feed costs, one of the largest expenditures for livestock operations, have increased significantly, as well as fuel costs. Yet beef, pork and chicken prices have not increased proportionately, resulting in reduced profits or even losses for many livestock operations. Despite good demand for protein, price increases are needed to cover the higher feed and fuel prices. If grain prices remain at current levels for an extended time, many livestock operations will be reporting annual losses.
Summary
For those who can take advantage of the opportunities in the agriculture industry, these are truly exciting times. For livestock producers and those outside of agriculture, today’s environment is creating challenges. For everyone in agriculture times are volatile, and how we manage this situation and the increased risks will determine the survivors.
1st Farm Credit Services is well positioned to help our clients through these times. We are here to help you capitalize on the opportunities, understand the risks and manage the risks facing your operation. Best wishes for success in the rest of the year.
Gary J. Ash President/CEO
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