Be Cautious, Not Afraid When Looking at New Opportunity

Article by Bob Young, Chief Economist & Deputy Executive Director, Public Policy, American Farm Bureau Federation

The Economic Research Service of the United States Department of Agriculture released new estimates of farm income in early February.  Net Farm Income – which includes changes in the value of inventories and other non-monetary factors – for 2016 is projected to be down 56 percent from levels seen as recently as 2013.  Net Cash Income, which only looks at the cash revenue and cost parts of the ledger, suggests a decline from 2013 in the 30 percent range, but still…

The bottom line is that farmers are now facing a much different economic environment than was the case in the recent past.  And nearly all organizations that make a living putting together long-term projections for the sector think the new norm for the building blocks of farm income – corn, soybeans and wheat – are likely to sit at new price norms of $3, $8 and $4 a bushel respectively for a long time in the future.

With the Federal Reserve poised to have further conversations regarding ‘lift-off’ on the interest rate front and a strong dollar, comparisons to the early 1980’s seem to come up every day. The balance sheet for the sector looks much, much better than was the case in say the late 70’s or early 80’s.  Nearly all financial ratios are at very respectable levels.  Yes, some anecdotes of farmers facing challenges from their lenders are popping up, but individual cases are individual cases.

So what should producers and those that service the sector do in this environment of potential economic stress?  One option is of course to ‘hunker down’ and refuse to look at any economic opportunity.  Many a gray-haired farmer can point to those who came through the 80’s, that expanded rapidly and who are no longer in farming.  But there are certainly others who took advantage of land sales of farms suddenly became available after being off the market for decades.

Opportunities are out there today and likely more will develop tomorrow. Each case is going to require specific analysis, whether it be a chance at a new farm or to expand a grain handling operation.  The point is to have realistic expectations as to how the related commodity markets are going to perform.  If a business plan makes sense at the $3, $8 and $4 levels discussed above, with interest rates potentially double where they are today, then it may deserve serious consideration.

From a handling standpoint, if it takes double the current load to make the investment work, you’d better have a pretty good plan on how the organization is going to take market share from someone else as the same long-term forecasting groups touched on above are not looking for any major export boom. 

On the other hand, if you need zero interest rates, corn prices in the $8 range and every barge on the river ready to be filled tomorrow, such an investment might not be the best move.

The one-liner I’m telling most farmers and ranchers today, and which certainly applies to the grain handling sector, is this: Be cautious, but don’t be afraid.