Minding Ag's Business
Marcia Zarley Taylor DTN Executive Editor

Thursday 05/08/14

If You Farm, There's No Place Like Home

Starting 15 years ago, I took four trips and about four dozen farm leaders on visits to the Brazilian frontier. Outposts were so remote, we chartered our own planes to criss-cross a region the size of our 12 Midwestern corn states. Growers like Patrick Duncanson of Mapleton, Minn., were in awe of the scale of farming we witnessed in remote Mato Grosso villages and the first of its kind soybean export terminal via the Amazon River. Most of us came home defeated and worried that U.S. agriculture would need to up its game to stay competitive in world markets as Brazil matured.

Brazil has indeed emerged as a world class competitor since then, but what North Americans haven't fully appreciated was how much the blessings of a stable U.S. business climate, low interest rates, crop insurance and investment incentives have been able to revitalize our own stature in world agricultural trade. None of us anticipated how a surge in corn demand between 2006-2012 would transform our own farm economics and convey long-lasting benefits on our industry. In the last decade, we've wiped out 40 years of cobwebs and revitalized aging farm equipment, grain storage, drainage, irrigation and the U.S. rail system, just to name a few benefits.

Acclimating to more moderate prices won't be easy, especially if you're highly leveraged or have expanded on rented farmland at peak cash rents. What's more, USDA believes the Black Sea region could challenge U.S. in corn and feed production, becoming the world's second largest corn exporter in the near future. We'll see.

I have confidence most U.S. operators will adapt much more easily than they did after the 1970s excesses. It's fair to say the financial and risk management skills of today's operators are like comparing the brainpower of a modern laptop computer to the old IBM correcting selectric typewriters. Crop insurance also buffers put a floor on farm incomes, and prevents havoc in widespread droughts like 2012. What's more, growers seem more comfortable using options, futures and other hybrid cash contracts to enhance their positions, knowing that "crazy good" profits can be fleeting.

One other interesting phenomenon is how astute operators have solidified relationships with their lenders during this era, knowing that banks need to understand your business if you want them to stick with your strategies long-term. Independent pork producers like Steve Moest of Illinois shouldered all the risk as corn spiked in 2008-09 and again in 2012; today profits have returned but so have massive margin calls on futures contracts as live hog prices gained 45% this year.

"Getting our lenders on board with us and understanding what we're doing when it comes to our risk management strategies is key today, especially when it comes to making sizable margin calls," Moest emailed me. In the last few weeks, some Farm Credit System lenders say they have been advancing up to $62/head margin calls for their pork clients, without complaint.

"We have a conference call every Tuesday morning with Cargill and our banker is included with the call so he knows exactly how we're covered and at what percentage and what we're thinking and we always invite him to the webinars we view," Moest said. "There are getting to be fewer and fewer bankers that have animal ag experience and the volatility can make them weak at the knees at times, and we can't afford to have that happen."

On a macro front, the U.S. has made gains as well. Yes, I know there are consortiums of international grain companies that have promised to spend $2 billion to improve northern ports and roads for Brazil's export arteries, but it isn't like North Americans have been sitting idle. We haven't made upgrades to the precarious Upper Mississippi system, but our rail system has added more than 525 shuttles. Our Pacific port capacity has ballooned 30%, with the addition of new export terminals closer to Asia. The addition of 2 billion on-farm bushels of new capacity in recent years has given growers more clout to think with a country elevator mentality.

In attempt to put these advances in perspective, DTN's Katie Micik, Todd Neeley and I launched a nine-part series reflecting on how Americans spent the wealth from this rare era in agriculture, and how our industry will be for the future. You can read the full report on "Ag's Great Affluenza" at http://www.dtn.com/…

Pat Duncanson still can't believe how much better off southern Minnesota is today, with ethanol plants, soybean processors, shuttle trains and feed mills now vying for his crop. I hope you conclude, like I do, there's been no better place to farm than home the past 10 years. Now make the most of it.

Follow me on Twitter @MarciaZTaylor.

Posted at 3:04PM CDT 05/08/14 by Marcia Zarley Taylor
Comments (2)
Marcia: Thank you for the superb information. I agree with you on the notion that the U.S. infrastructure and political stability are a real blessing to us. However, I could see a scenario in which food prices reach such a high level that an over-zealous government could start to confiscate land "for the common good." I know at first blush, this may seem unthinkable. However, look at what has happened to some of the Western lands. I hope and pray we keep our traditional representative republic with private property rights, but I am a bit of a skeptic given what I have seen in recent years.
Posted by tom vogel at 9:34PM CDT 05/11/14
We all know Marcia how privileged a select group of growers are that are targeted with massive government crony capitalistic benefits. What some people like you Marcia do not comprehend is how many Americans are financially harmed by big government schemes such as federal crop insurance and corn ethanol mandates that work to raise the costs of growing food and the costs of buying food.
Posted by T Kuster at 1:59PM CDT 05/12/14
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