At Chris Hurt's ag outlook presentation last week in Wabash, he led off by invoking a quote from the late USDA Secretary Earl Butz.
"Earl used to say that nothing cures high prices like high prices,"' said the Purdue Extension ag economist.
He then said that farmers are enduring "the cure" for those good times of the last few years. Favorable economic conditions for farm commodities had spurred increased production, with the last three years seeing surplus production of corn, soybeans and wheat worldwide, resulting in the current low prices for those commodities.
But Hurt also offered a bit of encouragement to his listeners at the first meeting of this year's Wabash County Adult Farmer Class series.
"Earl also said that 'nothing cures low prices like low prices," he said. "In a free market environment, whenever you have periods of either high or low prices, it's necessarily going to cause adjustments to be made. We're now in a period of low prices that's going to set us up for better times down the road."
However, Hurt cautioned producers not to expect the cure for low prices to come for at least two to three years.
"It's what's known as the 'irreversible supply curve,'" he said. "When prices are good, farmers invest in more technology—machinery, GPS, genetics, drainage and more—which makes production more efficient. And once farmers have those technologies in place they don't stop using them, which helps to keep production high. It takes a number of years for low prices to force adjustments in the amount of those commodities being produced."
Adding further headwinds to prices for corn, soybeans and wheat, is sluggish U.S. exports. Besides an excess of supply in the world, Hurt said that our exports were being hurt by the strength of the U.S. dollar. He said that the U.S. economy was doing reasonably well now, which makes our dollar stronger in relation to most foreign currencies.
While that is a good thing for the American economy in many ways, it makes it more difficult for U.S. producers of goods, including agricultural goods, to compete with countries having a weaker currency, by making American products more expensive in comparison. Hurt said that compared to the U.S., Argentina's weaker currency gave that country a 36 percent advantage in price to world buyers, while Brazil enjoyed a 30 percent advantage and Russia, 16 percent.
Hurt then moved on to interest rates. He said that the Fed's recent interest rate hike, although only a quarter percent, had been accompanied by the announcement that rate hikes would continue, probably for a number of years.
He said that the Fed had lowered interest rates to an extremely low level to help the nation's economy recover from the recession of 2008. Although it appears to have helped in that regard, that move also created winners and losers. The losers were savers and retirees, who had been hammered by not being able to receive a competitive rate of interest on safe investments like savings accounts or CDs that would even keep up with inflation.
The winners were borrowers. With historically low interest rates, it was a great time to buy cars, pickups, machinery and land, which was what the Fed wanted to do to stimulate the economy.
However, he said that the Fed's current move to gradually raise interest rates was to return to a period of "normalization," where the pendulum would swing from favoring the borrowers to striking more of a balance between borrowers and savers.
As interest rates continue to rise, Hurt said that that would also squeeze margins, by increasing borrowing costs. He said it would likewise have a moderately downward impact on land values.
"Without the ability to borrow as cheaply, when land comes up for auction, farmers are going to have less ability to 'go one more round' in the bidding," he said. He said a reduction in land prices of 25 percent in the next two years was realistic. He predicted that cash rents would also slowly work their way down.
Regarding corn prices, Hurt saw March futures of $3.80 to 3.90 as possible, with an outside chance at $4 to $4.10. With beans, he saw $8.80 as possible with a possible upside potential of $9 to $9.20.
Hurt said that he thought it was likely that a few acres would shift from corn to beans for 2016. He said that Purdue's estimated crop budget showed a small advantage for beans on low or average land, while corn held a slight advantage on high quality land. He also said that some lenders may encourage farmers to plant beans to keep their operating loans lower.
Hurt did note a few positives, with the prices for both fertilizer and diesel fuel having dropped significantly. Another factor that would help some would be increased FSA ARC-County payments estimated to be $63 per acre for 2015 crop year (paid in October 2016), compared to $12 for the 2014 crop year. This increase is largely due to low yields caused by heavy rains in northern Indiana in 2015.
The picture was no rosier for livestock producers. Hurt said that while the livestock sector had recovered from high feed prices, there were substantial expansions occurring among virtually all species. He said that margins would grow tighter as a result, with hogs already losing money and dairy right at breakeven.
Hurt pointed out that much of how individual producers were able to weather this storm would depend on how they'd handled their finances during the good years.
"It's kind of like in the Bible, where it talks about saving the excess from the seven good years, and using it for the seven lean years," he said.
He said that farmers who had used those years to build their working capital would likely survive OK. Those whose working capital position was not as strong would struggle, with some possibly going out of business.
As he wrapped up his presentation, Hurt asked the rhetorical question, what can producers do to help themselves during this period of tight margins? "A lot," he said, and listed a number of measures, most of which came under the heading of "belt tightening." Among them:
• Reduce capital purchases
• Cut family living expenses
• Liquidate excess assets
• Seek lower input costs
• Seek additional farm-related income
• Pursue reduced cash rents
• Seek to effectively utilize crop insurance, government payments, FSA disaster loans
• Work with your lender as your financial assistant. Consider restructuring time periods, increasing borrowing against real assets, and letting your lender know sooner than later if you can't fully repay your operating loan
• Develop a one-year plan, and one for three to five years
"We will get through this," he said. "We want to get through it, strengthen ourselves and position ourselves for what I think will be some good opportunities. There are going to be more changes in land and enterprises than we've seen for awhile. That's a good thing for those of you who want to stay in this business or expand."