Minding Ag's Business
Elizabeth Williams DTN Special Correspondent

Tuesday 08/26/14

Land Costs Hamper US Competitiveness

Agricultural economists from around the world met in Des Moines last week to assess global competitiveness of the world's key corn and soybean producers. Using 2011 data, Brazilian soybean farmers and Ukrainian corn farmers scored highest profit margin, with a typical U.S. farm in Iowa coming in second ahead of Argentina for both corn and soybeans and ahead of Brazilian corn producers.

Ukraine (UA) farmers scored the highest profit margin corn in 2011, followed by the U.S., according to data compiled by the Thuenen Institute. US700IA stands for US benchmark farm of 700 acres in Iowa.

Why wasn't the U.S. first? "In the U.S., as profits increase, so do land costs for American farmers," explained Yelto Zimmer, a senior crop economist at the Thuenen Institute of Farm Economics in Germany. He coordinates the global agri benchmark crop network which tracks economics of typical farms in 40 countries.

"The U.S. has huge room to maneuver [by lowering land costs]," Zimmer said. "The U.S.'s low direct and operating costs give it a significant advantage over both typical farms in Mato Grosso (Brazil) and in Eastern Europe.

"The biggest challenge to U.S. farmers will be how fast and how far rents will fall with lower farm gate prices," Zimmer said.

High land rents account for about half of U.S. soybean costs, almost equal to direct, operating and other costs combined. For corn, land was more than a third of the total cost of production in the U.S, according to the data presented by Kelvin Leibold, a farm management specialist with Iowa State University Extension and Outreach.

Partly offsetting that disadvantage is that U.S. and Ukraine have a tremendous competitive advantage in transporting grain to export markets. To transport corn from a typical farm in Iowa to the nearest port ($38/ton) or in the Ukraine to the nearest port ($12/ton), is much cheaper than in Brazil's Mato Grosso region ($120 /ton) or in Argentina ($60/ton) from farm to port.

Where are the potential surprises? Which countries are on the brink of competing with U.S. farmers? "Russia has enormous potential," noted Zimmer. Sergey Chetvertakov, from Russia, getting his PhD at the Thuenen Institute, predicted Russia could realistically double its corn exports in the next 3-5 years above the 2013 total of 4 million tons.

Much will depend on the price of corn versus wheat, countered Dmitry Rylko, general director for Agricultural Market Studies in Moscow. "Russia is and will continue to be a great wheat producing country," said Rylko. "In some key production regions we don't get moisture at the right time for corn production but there could be opportunities for irrigation. And, because of our short season, we have to harvest corn in Central Black Soil region at 30-33% moisture, so drying is expensive and there can be aflatoxin problems."

But corn acreage is increasing. Since 2000, corn acres in the Central Black Soil region increased by about 17% annually. "We are already seeing farms in Russia with western management moving completely to a rotation as in North Dakota or even Iowa," said Zimmer. And yields could continue to improve. Corn yields on the "agri benchmark" 45,000-acre Russian farm in the fertile Central Black Soil Region averaged 125 bpa in 2013, up from just over 100 bpa in 2011 and 2012. For the region as a whole, since 2005, average corn yields have bounced around from 50 bpa to 82 bpa (that does not include the 2010 drought year when corn yields were less than 20 bpa). Improved yields combined with increasing acres could greatly increase Russia's corn supply, said Chetvertakov.

A big limiting factor for Russian crop production, in general, is "lack of know-how," Zimmer said. "The technical knowledge is very often missing. You could take 10,000 U.S. farmers and give them each 5,000 hectares (12,300 acres) in Russia with the inputs they need and they would convert that in no more than three years to 50% higher yields."

However, when talking about such a large cultural change, Zimmer admitted it is hard to predict how long that would take, or if it would happen. "Political conditions and widespread corruption are not very favorable. Well-trained and motivated people are hard to hire. And, due to enormous farm sizes, efficient management is not as easy to realize as in the West," Zimmer said. "Furthermore, farms which do not belong to so-called agro holdings face major issues to get access to credit."

Brazil has tremendous untapped capacity. But "we've said for the past 10 years, Brazil needs to improve its transportation infrastructure… only very little progress has happened," Zimmer shrugged.

A diamond in the rough is Argentina. "Argentina has the potential to be a huge corn, soybean, and beef exporter, but the government there does everything it can think of to hamper its agricultural industry," Zimmer explained.

China has the potential to increase corn yields. But that also is slow to develop. In two top corn producing provinces, Heilongjiang and Henan, average corn yields are around 91 bu./acre. Yields in Henan province have stagnated at that level from 2006 to 2012, according to Xiangdong Hu, associate professor at Beijing University of Agriculture. China's demand for corn continues to increase, as hog production moves to larger, commercial production. Family-sized operations of 1 to 50 hogs have decreased from 59% of total slaughtered hogs in 2006 to 32% 2012.

"Families used to raise one or two hogs and feed them waste material, vegetable leaves, grass from farmland and lesser concentrated feed," explained Hu. "With newer, more productive breeds, the hogs now raised in backyards get more diseases. And as rural Chinese move to the city, the lack of labor in the countryside has caused individual farmers to stop raising hogs. Commercial hog operations which feed a more concentrated corn diet have increased corn feed demand," Hu said.

Bottom line: U.S. corn and soybean farmers are extremely competitive in the world market, if you don't include land costs. Even including land costs, profits were made in 2011. Argentina is the only country with lower non-land costs. But corn and soybean export taxes and high transportation costs erode Argentina's competitiveness.

EDITOR'S NOTE: Yelto Zimmer will address the competitiveness of U.S. agriculture at the upcoming DTN-The Progressive Farmer Ag Summit in Chicago Dec. 8-10. For details go to www.dtnagsummit.com. Agri benchmark Cash Crop is a non-profit network of agricultural economists, producers and specialists from 40 countries. For more information visit their website at www.agribenchmark.org.

Posted at 1:26PM CDT 08/26/14 by Elizabeth Williams
Comments (3)
I see no actual numbers here for direct production costs. How much more is our land cost vs the other countries? How much is the difference of our input costs from one region to the other. Even seed costs are different from one region to the next here in the USA since the suppler will usually charge what the market will bare. We really don't know much if we can't get our heads around the per acre margins in other countries.
Posted by Vince Moye at 6:42AM CDT 09/03/14
I am wondering if in this analysis we aren't overlooking the elephant in the room. The US is producing GMO based commodities while in Russia, and China, and much of Europe there is a strong resistance against them. This resistance appears to be well established in Europe and growing. Except for transportation costs, unless we stratify the GMO vs. non-GMO as different crops, production costs by country aren't reliable. This is because the GMO's win on yield per acre, but are serving different customer bases. We should be aware that there appears to be increasing resistance to sale of meat produced with GMO inputs .
Posted by Lloyd Willard at 7:56AM CDT 09/05/14
Crop production works best in a Democracy where there is relative stability as in we know what is going to happen when we budget for a crop. We don't get "blindsided" too often. Fortunately a "Jimmy Carter " doesn't happen too often. I have heard of $3.50 corn 2014 for two years . As the Man says, "Save some for the lean times".
Posted by james kuntz at 10:33AM CDT 09/05/14
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