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Ag Census: Input Costs Rise, Farm Income Declines Amid Low Commodity Prices

When the 2017 Census of Agriculture was released last week, almost nobody was surprised to learn that farmers were paying more for inputs than they did in 2012, and it wasn’t overly shocking that income declined.

The average per-farm expense was a record $159,821 in 2017, up from $155,947 five years earlier, according to the census. Income, meanwhile, fell slightly to an average of $43,053 per farm from $43,750 in 2012.

Rising costs of inputs including seed, fertilizer, and labor combined with lower on-farm prices for grains, soybeans, and a host of other agricultural products led to the increase in expenses and declining income in the five years through 2017.

“It was a combination of both (rising input costs and declining futures), but the larger factor was the lower commodity prices” said Brian Grossman, a marketing strategist with Zaner Ag Hedge Group in Chicago, who owns a farm growing corn and soybeans in North Dakota. “In 2012, they were short on the crop and they were selling $7 cash corn. Now a lot of people are saying the cash average is around $3.50, so that’s been cut in half.”

Lack of Supply Shock Kept Prices Low

Prices, which have been low for about five years, have stayed down due to the lack of a supply shock – there’s been no major weather events that have affected grain output in several years, which has led to increased global stockpiles that have outpaced rising demand.

That may lead to further consolidation in the industry, said Jay Parsons, an associate professor of ag economics at the University of Nebraska at Lincoln.

“If we go another couple years with low prices, I would expect that,” he said. “People were worried before because they thought it would take until 2020 or 2021 to work itself out, but now people are really worried that it will take until 2024.”

Farmers had a cushion after the 2012 and 2013 marketing years when prices were high. Many saved or invested their money in land or equipment, but the wealth and equity that was built up during years of high commodity prices are starting to be “chipped away” for some producers, Parsons said.

Farmers need to get used to the idea of rising expenses as the large companies that sell inputs aren’t going to lower their prices, said Jeff Kaprelian, the director of brokerage services for CGB Diversified Services in St. Charles, Illinois.

“Expenses will continue to rise,” he said. “They’re publicly traded companies. These companies have shareholders, so they have to make money.”

Government Payments Increase Census to Census

Also rising census to census was the amount of government payments paid to farmers, which jumped to $8.94 billion from $8.05 billion during the five-year period, USDA data show.

That’s another trend Parsons said he doesn’t see shifting as the Farm Bill passed at the end of 2018 didn’t change much from the previous legislation.

Regardless of how far down prices go, how long they remain low, or how much expenses increase at the cost of profitability, the federal government will essentially be unable to do anything including increasing insurance or payments until the next farm bill in five years.

A one-off government payment similar to what some producers are receiving to offset losses due to the ongoing trade dispute with China will pop up every now and then, but for the most part, few things are going to change in terms of insurance or government payments, Parsons said.

To survive, farmers can diversify or perhaps get a job off the farm during the winter months, for example, to make ends meet during down times, something that becomes more popular when prices are low, he said.

Diversification Will Help Some Survive

Theoretically, diversification is used to mitigate risk, but in some cases – such as now when expense costs are rising but commodity prices aren’t – it can be a tool to earn more money.

“What I tell farmers is if they’re looking at diversification to increase income, maybe do something that’s not correlated with corn and soybeans when times are down, because when corn and soybeans come back, what you’re into may not look as good,” Parsons said.

Still, attrition and ensuing consolidation in the agricultural industry is inevitable.

Grossman said he could name 10 people who’ve exited farming in the past two years due to low commodity prices and rising inputs. Generally, small producers will sell to larger farmers that can handle more risk or survive for much longer in times of low prices, he said.

It’s unlikely he’ll ever sell his farm in south-central North Dakota, where corn and soybeans occupy acres where wheat and sunflowers were planted when he was a child. If anything, he wants to snap up more land and expand his holdings.

Farms With Economies of Scale Will Survive

Parsons said that’s where he sees the agricultural industry headed in the future – either there’ll be small hobby farms where the principal owner farms part time and has a job in town or extremely large holdings that will be rented. It’s unlikely medium-size farms will survive, he said.

Census data show that farms are indeed getting bigger.

The average farm in 2017 was 441 acres, the highest since 2012 when it was also 441 acres, according to the report. That’s not a trend that’s going to reverse, Kaprelian said.

“If you look at the farms, they’re getting bigger and bigger,” he said. “That’s because there’s no other way to survive. It crunches the smaller farmers out, and those companies that have economies of scale are the only ones who can survive.”

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