WSJ: Glory Days Fade for U.S. Farmers

Ok, I'll have to take "discredit" for some predictions such as the continuing glory days for U.S. farmers. It looks like times are even becoming tough(er) down on the farm; although I suppose it is all relative. Many are coming off historic boom times and cash flush, so a slowdown from that level would still be positive versus where many in other industries are coming from.

However, there are still some interesting comments in here that overlay our comments from the previous year - namely the global competition for resources. Thus far, fertilizer prices (more so) and equipment prices (less so) have not fallen much as farmers worldwide are competing for the same pool of resources. Maybe this will change but it seems hard to believe that as global population grows people will cut back on food in aggregate.

So we have a precursor for a problem that I believe will accelerate in the decade ahead - squeezed margins as a limited pool of resources is demanded by multiple global customers. During flush times in the global economy this should be our standard path as too many humans scurry for resources - much of that resource demand is however economically dependent (copper, oil), but food? You'd think not so much (but it hasn't helped the stocks in the agriculture sector from being destroyed).

What will be interesting is to see is this demand pressure continues in agriculture despite the global slowdown. We'll know better a year from now.

Excerpts below (emphasis mine; comments in italics):

• The Farm Belt, one of the hottest parts of the U.S. economy in recent years, is rapidly cooling. The Midwest faces plunging crop prices and stubbornly high production costs. Corn prices have dropped from $7.54 a bushel around July Fourth in central Iowa to just $3.81 a bushel on Tuesday. But growers are hearing from suppliers that fertilizer and seed costs could rise by more than 40% each for next spring's plantings. Some farmers are postponing equipment purchases and considering whether to plant less of such high-cost crops as corn come spring. (hmm, that's going to be a problem for our great corn ethanol boondoggle... err push)
• Many Midwest farmers worry that the combination of lower crop prices and high costs will usher to an end, by next year, one of the most flush periods in American farm history. This year, the U.S. Agriculture Department is predicting that U.S. net farm income will hit $95.7 billion, up 10.3% from last year's $86.8 billion and nearly double the $58 billion of two years ago. Annual U.S. farmer profits bumped around between $40 billion and $60 billion for seven years until 2004, when they rose to $85.8 billion. Now, farmers fear a big drop in next year's profits. Most economists figure the Farm Belt can weather a slowdown, partly because farmer balance sheets are strong, and partly because federal mandates will increase the amount of corn consumed to make ethanol fuel next year. Also, economists think global demand for U.S. crops will remain robust despite recent economic troubles.
• The uncertain outlook already is expected to cool demand for Midwest farmland, where prices have jumped by double-digit percentages for four consecutive years. In June, a piece of McDonough, Ill., farmland sold for $7,750 an acre, just 20 months after the seller had paid $4,700 for it.
• Prices of corn and soybeans, the nation's two biggest crops, have dropped by half since early July, when fears eased that Midwest floods had reduced the potential size of crops.
• For many growers, their breakeven costs have climbed so high that they could lose money next year even if crop prices are above the levels long thought to be too strong to warrant subsidy checks from the U.S. government. Farm trade groups and Farm Belt politicians already are pressing the Bush administration to interpret the newly adopted five-year farm bill generously.
• Lower corn prices help ethanol producers, because corn represents about 75% of their costs. But the falling price of crude oil has depressed the price at which the companies can sell ethanol, which competes with gasoline. The ethanol industry's 50% profit margins of four years ago, which helped ignite a plant-building boom across the Midwest, have shrunk to less than 5% at many companies. New construction projects are being halted.
• Economist David Oppedahl at the Federal Reserve Bank of Chicago says farmers have unusually strong balance sheets. The debt-to-assets ratio of the farm sector is just 9%, down from its peak in 1985 of 22%. While many urban families heavily leveraged themselves to buy homes in recent years, many farmers were still so debt-adverse that they bought land with cash or made big down payments.

Comments

[joeevan:]

It is peculiar that this article would appear at the same time that Seeking Alpha featured a piece titled "Agrochemical Sector a Bright Spot in Slowing Global Economy," and noted that "record U.S. farm income is forecast for 2008, which should boost farmers’ purchasing power of fertilizer, as well as the latest state-of-the-art seed varieties. In addition, fertilizer prices should remain high because of tight supplies and strong demand globally, S and P said."

Also, yesterday, the CEO of Syngenta (SYT) noted that "The sales figures we have presented today attest to the strength of our business in a turbulent global environment. The fundamental drivers for agriculture remain unchanged, with rising food and feed demand inevitably requiring increased use of agricultural technology in a context of limited land availability. Our confidence in Syngenta's near term as well as its longer term performance allows us to reaffirm our target for earnings per share* growth of more than 35 percent in 2008 and high teens in 2009."

Agrium (AGU) is currently trading near 52-week lows and with a PE of 4.5.
This is a good time to buy/add AGU.

2008 Oct 23 01:41 PM

[Eye Forget:]

Here's a different take. The farmers are responsible for much of this problem.

We split our time between Europe (Switzerland) and the US. Here's some observations:
- ever see much prime beef in US supermarkets anymore?
- US beef used to be a selling point on European restaurant menus. Now its virtually non-existent. Its priced the same or less at retail.
- US produce does not even resemble what produce tastes like.
- US pork has a natural growing market in the far-east yet its considered too low in quality to sell at anything other than a major discount.

US farmers fell in love with mass production. Feed them fast, feed them cheap, transport them in deplorable conditions (a significant impact on the quality of meat is stress level) and respond to whatever prices supermarkets dictate.

A dependence on chemical fertilizers and a poor distribution strategy aimed at providing Americans with "choice and price" rather than something that tastes like food drives this industry. Hopefully tomatoes can be used for ethanol production as they're not much good for anything else.

Like the auto business, US farmers have placed themselves at the lowest margin end of the business. And, like the auto business, its a dillema of their own making.

They know it. Go on ag forums and read the discussions. These are smart businessmen and the discussions are quite frank. They simply have to find the cojones to redirect their business model or face a slow creep towards obsolescence.

"Value". This country is going to "value" itself into extinction.

2008 Oct 23 07:05 PM

[Paul Killinger:]

I dunno. I'm no fan of federal farm "pork," but food stamps and all, we're still the best fed country in the world. As for the tomatoes you're crying about, if they're from NJ, send 'em on down. I'll take care of them for you.

2008 Oct 24 11:51 AM