The decade of the 1980’s saw a dramatic shift in the capital structure of American agriculture and the ownership of its assets.  A massive accumulation of farm debt in the 1970’s ran head-on into an unfavorable economic climate and incredibly high interest rates in the 1980’s.  The result was that many previously successful farmers went out of business and the agriculture land market hit rock bottom.

Some of the pressure arose from new farming efficiencies.  Producing greater quantities of farm products required the efforts of fewer people thanks to new technology.   Given the capital intensive aspect of modern agriculture, farmers were under increasing pressure to become even more efficient.  This required substantial investments in modern farm machinery which is very expensive.  Tractors, a combine, new planters, grain storage and other technologies such as irrigation, lead to better production, but did not come cheap.  Add in the cost of land and the cost of capital to buy all of the above and it becomes obvious that margins get squeezed.  The result was extremely high debt to income ratios. 

During the mid 1970s, economic factors were good.  Interest rates were relatively low, so farmers could borrow cheaply. People in foreign countries wanted American agriculture product and had the money to pay for it, so foreign markets became important to the farmers.  Prices for ag land seemed reasonable so farmers were buying more land on credit to expand.  In the 80’s the economy went bad.  Outside economic factors forced interest rates up.  Farmers had to pay more for the loans they needed to operate each year. In addition, consumers tend to buy less during bad economic times, so the prices paid for farm commodities went down.

With less demand and lower prices for their products, many American farmers had no way to pay back the banks for the loans they had taken out. Many borrowed even more money, hoping that better crops and prices would rescue them in a year or two. It didn’t happen.

In the 1980’s, foreign markets dried up driving prices down further. Russia invaded Afghanistan and President Jimmy Carter responded by stopping the shipment of US farm products to Russia. That embargo on farm products hurt the farm export market.  At the same time, other countries experienced hard economic times as well. U.S. farmers could not sell as many goods overseas as they previously had.  The same farmers had invested heavily into equipment to increase production capacity for a market that seemingly disappeared.

In the 70’s and early 80’s, the common held belief (mentality) in the farming community was that a farmer should own every acre he operated.  At the same time, new aggressive investors were entering the market.  This new investor added competition to the cost of land. The cost of every available acre was bid up far beyond its realistic economic value.  The new investors were not interested in the moderate but stable returns that farmland had historically provided.  Many entered into highly leveraged transactions accepting low cash on cash returns for the chance to profit from rapid appreciation.  The situation was very similar to what we are seeing in the current residential real estate market where speculators bought investment properties hoping to capitalize on the booming housing market only to get left making payments on homes they could not sell or rent when rates went up. 

Skyrocketing interest rates and declining farm exports (plummeting commodities prices) quickly led to a collapse in the market which eliminated many investors and farmers alike. 

For the farmer, the solution for increasing profitability and reducing risk is a combination of equipment ownership, and some land ownership mixed with renting additional land to meet the maximum production possibility of the equipment.  Most farmers today recognize the advantage of outside investment capital.  They seek out land investors who prefer to enter into cash rent or crop share arrangements.  The need for farmers to reduce their debt has resulted in many farmers selling off portions of their farms to investors, and then leasing it back.  This creates an increase in their capital efficiency, reduces their debit to income rations/risk, and results in a better ROI.

Farm Progress Show 2007

The purpose of this trip was primarily to gain both general and detailed information on farming practices and techniques that I had never been exposed to and to learn about new technologies. 

I had the opportunity to watch field demonstrations of differing types of equipment including the newest combines, grain movers, tillers, and planters.  I also spent time learning about grain dyers and differing storage methods and the construction of grain bins.  Companies that represented irrigation systems were few and far between; I assume because I was in Illinois where irrigation is not common. 

When looking at new equipment and associated technologies, I was impressed to see the GPS technologies that I have read so much about put to use.  John Deere demonstrated a system that let a farmer sit in a machine such as a planter and never have to touch a single control, the steering wheel, or pedal.  They sold this as a system that prevents operator fatigue, but I would assume that at some point in the next 5/10 years many of the functions of the operator will be automated.  Virtually every manufacturer had some GPS functions and there were numerous third party vendors.  Caterpillar and Deere had the most powerful systems that were fully integrated in their new machines. 

I visited the 3 major seed producers and reviewed their newest hybrids.  Pioneer (Du Pont) / Monsanto / Dow.  I was fortunate enough to have an accredited Farm Manager (Dave) along with me to explain some of the differences in the Traits that were being displayed.  He was able to help me understand strengths and weaknesses between the different producers, and how some of the technologies are licensed between the companies.  He also provided historical reference and other interesting commentary. 

In the end, it was Dave’s opinion that Monsanto is years ahead of all competition.  The newer products that they showed us (some of which won’t be available until 2009/10) will reduce/eliminate other input costs that farmers currently have to add separately like nitrogen.  (they have created corn that uses nitrogen more efficiently) Monsanto made it clear that they plan to charge more for such a product and expect that farmers will be willing to pay a premium for cost, time, and fuel savings.  As evidence of Dave’s faith in the Monsanto product line, 80%+ of the farms he and his firm manages are planted with Monsanto corn or beans.  Monsanto also demonstrated a forthcoming omega-3 enriched soybean which they think will be very profitable although that will fit more into a specialty food production vertical.  (not for all beans)

I made many other industry contacts who were both knowledgeable and qualified and seemed happy to talk faming with me.

I have said for some time now that these high corn prices aren’t just being driven by ethanol.  It certainly is a factor, but food and livestock feed and human consumption are the majority consumers now, and they still will be in the future. (even with the RFS)

So just how much grain does it take to add some weight?  Here is a handy chart.

Who knew hogs were so efficient?  It must be all that laying around.  

Just a quick FYI the Carbon Credit Enrollment Deadline is August 15, 2007.  Any Farmers or land owners wishing to participate and earn income by storing carbon credits in your soil through no-till crop production and long term grass seeding should contact Dale Enerson at 800-366-8331 (EX 116) or Connie Sova at 800-366-8331 (EX 154).  You can also email carboncredit@ndfu.org.

Learn more about the program at: http://nfu.org/issues/environment/carbon-credits