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Low Crop Margins? Learn From 1990s Innovation

1990s redux?  Heaven forbid, but If we’re headed for years of low crop margins, here are lessons from a decade of innovation.

You likely haven’t seen recent 10-year price projections from USDA or FAPRI, the University of Missouri’s Food and Agricultural Policy Research Institute.

That’s probably a good thing. 

After the summer’s daunting plunge in corn and soybean prices, you won’t like those decade-long lists of corn prices stuck just above or below $4. Projections, of course, aren’t predictions. They extend everything economists know about today into the future. Even the smart folks at USDA and FAPRI can’t forecast a decade. Still, if we’re headed for years of stagnant prices and slim margins, I’m reminded of the decade of the 1990s. Economist Pat Westhoff, who heads FAPRI, concurs. “It’s not exactly a parallel, but there are some similarities,” he says. At the start of that decade as at the beginning of this one, “people were very bullish about crop prices,” he says.  

For you young farmers who were in grade school then, the 1990s saw an export boom that crashed with the 1997 foreign currency crisis known as the Asian Flu. U.S. average corn prices started at $2.28 a bushel in 1990, peaked at $3.15 in 1995, and finished the decade below $2, depressed, too, by years of global good harvests. Today, we’re seeing the tail end of an ethanol boom and perhaps record U.S. yields. 

The late 1990s were a hardscrabble time of low returns. The genius of America’s farmers responded with years of innovation – beyond every year’s normal search for better yields on each farm and into group organizing and investment. It was the decade when Minnesota farmers ramped up farmer-owned ethanol output. In North Dakota, farmers built a durum wheat pasta plant in Carrington, while others started growing and marketing carrots. In Nebraska, farmers near Gothenburg helped convince Frito-Lay to build a white corn sourcing facility in 1996. A few miles east, the Kearney Area Agricultural Producers Alliance (KAAPA) began that year. The cooperatively organized investment group started several value-added projects. KAAPA Ethanol in Minden, Nebraska (now separately owned and still farmer-run), is one of its most successful. Nationally, the 1990s saw the USDA develop standards for organic food labels. That boosted consumer confidence in a market that grew from a niche to common grocery store offerings.

What can we learn for the future? The success of all this effort was mixed. Some ideas of the 1990s can’t just be dusted off. Many new-generation co-ops  of the 1990s failed. North Dakota carrots, for example, were muscled out by established California growers. The Carrington pasta plant is a survivor, but it is now owned by Post Holdings, Inc. 

That’s not failure, but a change in purpose, says Michael Cook, a former CEO who is an organizational economist at the University of Missouri and an international expert on co-ops. 

Limited liability corporations allowed farmer groups to sell shares tied to delivery rights. The goal was to raise prices. “It was, in a sense, an organizational revolution,” Cook says of LLCs. As successful LLCs grew, raising capital with more shares diluted the value of delivery rights. Gradually, successful LLCs became more like other companies. Shareholders focused on return on investment more than raising prices of inputs. “The co-ops that have made it these last 25 years have co-op genius, which means they know how to compete with investor-owned firms while paying the highest prices possible to farmers,” he says, citing a big global cooperative, Minnesota-based CHS, as an example.

If some investments of the 1990s can’t be replicated, I think several lessons from that time still apply today.

Three principles to enhance demand

1. Diversification remains a time-honored way to reduce risk. KAAPA tried it on a community-level in Kearney, Nebraska, to raise local demand for crops. Some projects failed. Others, like recruiting three large dairies, worked. 

“Value-added industries continue to be of great interest,” says FAPRI’s Westhoff. At the farm level, the 2014 Farm Bill offers $63 million for a few, very competitive value-added producer grants to diversify. It’s aimed at modest-scale local food production and supports processing at local food hubs. A good information source is the National Sustainable Agriculture Coalition (http://sustainableagriculture.net). 

2. Economics doesn’t operate in a government-free vacuum. The best ideas come from you and other entrepreneurs, not Washington. Yet, government can help, not hinder. The Clean Air Act of 1990 and favorable state laws fostered Minnesota’s early ethanol investment. The federal energy bills of 2005 and 2007 forced oil companies to open a bigger sliver of the energy market to ethanol and biodiesel. 

If the federal government doesn’t back down from the 2007 energy law’s renewable fuel standard, biofuels can still be a growth market, believes Paul Kenney, a Kearney-area farmer who helped start KAAPA and is president of KAAPA Ethanol. Farmers themselves and their co-ops could be doing more to encourage sales of E85,  he says. “All of the Corn Belt states could be doing a lot more and selling it to growers and doing more than they are.” Nor are they putting enough pressure on government. “The farmers themselves and the ag community need to get a lot stronger behind ethanol. If they do that, the politicians will be there,” he says. 

3. Just as in the 1990s, long-term changes that will increase demand and prices take a lot of lead time. KAAPA Ethanol started in 2003, seven years after KAAPA.

Most of you will never consider organic farming, even though organic farmers’ obsession with soil organic matter, cover crops, and rotations is starting to go mainstream. Like biofuels, it remains a market that has some growth potential left, even though grocery chains put downward pressure on prices. Anyone considering this path to higher returns needs to plan on three years to reach organic certification. Other adjustments in farming practices and recovery of yields may take longer. 

The co-op that owns the Organic Valley and Organic Prairie labels for dairy products and meats (CROPP – the Cooperative Regions of Organic Producer Pools based in La Farge, Wisconsin) remains true to its purpose of serving growers. I can vouch for it. My wife and I have friends from our Peace Corps days whose New York state dairy farm sells Organic Valley milk with good returns. (The co-op’s website, farmers.coop, says it is recruiting.)  

To be sure, today’s farm economy differs from the 1990s. Thankfully, it’s still stronger.

“It was more of a desperate time,” recalls Kenney. “I don’t think we’re there right now. People have put a lot of money in the bank.”

In the short term, many of you are already tightening spending to preserve that equity. Long term, you may prosper with the right, carefully considered investments in a new wave of diversification and added value.

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