What’s your Farm Future?
Citizens National Bank recently co-hosted an agricultural seminar with Williamson Insurance Group of Payne, OH. Featured speakers were Mike Zuzolo, President of Global Commodity Analytics and Consulting and Christopher Hurt, Professor of Agricultural Economics at Purdue University. Both highly respected in their fields, each provided their vision of the current ag economy and what forces they see shaping the future of agriculture.
A Global Perspective
“The risk that you take per acre is bigger today than the total revenue you used to receive from your farm when grain prices were lower,” stated Dr. Chris Hurt. He went on to explain that the total cost to plant corn per acre has almost tripled since 2005 from $185 to $461 in 2011. However, since commodities prices have risen exponentially as well, from $2.80 per bushel in 2005 to $5.50 per bushel for corn in 2011, the cost is worth the risk. He warns however that the boom may be close to ending, and while he doesn’t foresee a “bust” per se following it due to the continued worldwide demand for grain, he does think levels of demand will begin to level off and that would affect grain and land prices moving forward. “The rate of expansion we witnessed from 2005 to 2010 was as big as the entire decade of the ‘70’s when we last saw such an increased demand. That kind of demand is just not sustainable and supply will eventually begin to catch up with it,” says Hurt. Other areas of the world will also influence corn production moving forward. Due to government policies enacted in the last few years, the U.S. and Russia have both committed to renewable fuel standards that require a certain level of ethanol be blended with gasoline. However, government support for ethanol is not as strong as it once was and countries such as Brazil are now focusing on domestic production of ethanol from sugar cane, which will eventually be cheaper to produce than corn ethanol.
Mike Zuzolo concurred with Hurt’s assessment and went on to point out the correlation between a reduction in credit demand with a reduction in agricultural demand. “With the ’08 recession we saw a reduction in credit
demand in China. Since October 2011, the dollar has jumped 8% against other major currencies like the yuan. This hurts their ability to import grain from the U.S. and will hurt specifically the soybean market if our dollar remains strong.” According to Hurt, China currently purchases one-third of all the soybeans produced in the U.S., which equaled almost 1 billion bushels in 2010.
Worldwide the combined demand for soybeans and corn equaled an additional need for 30 million more acres from 2005-2010. Unfortunately, that increased acreage has not come from the U.S. but from South America. The Soviet Union, China, India and Africa are all also expanding their agricultural lands rapidly to keep pace with increased demand. “Fortunately, the U.S. is currently at an advantage due to our existing infrastructure, individual land ownership and ability to obtain financing,” says Hurt. There’s still a huge yield gap with the U.S. averaging 120 bushels/acre for corn and Africa at 35 bushels/acre. “Until those countries begin to see increased yields, the U.S. will continue to see demand for its products.”
Advice for 2012
So with the concern of leveling demand and increased input costs, what advice did Hurt and Zuzolo have for marketing grain in 2012? Hurt says, “You need to think about financial protection for your farm. There are three tools I recommend you consider in 2012. One, crop insurance; two, a marketing plan; and three, consideration of the FSA ACRE program, which is a price protection program based upon an average of your last five years’ yields.” Zuzolo recommends choosing your one most profitable crop and hold onto some of that in case the markets have an upturn. “Don’t hold both crops and wait and see – that’s poor risk management. Look at all your
crops combined together as a revenue breaker for your farm as a whole and determine your break-even price points.”
If you’re interested in viewing the entire presentation, email firstname.lastname@example.org and a link will be emailed to you once the video is available.