Many Midwest farmers will be looking to cut costs as farming grows more expensive and commodity prices take a dip this harvest year.
David Widmar, an agriculture economist at Purdue University, said his studies show some grain farms are likely to lose money next year.
“Things are looking pretty tough right now for corn and soybean production," Widmar said.
"And then when we look into 2015, some of the university budgets are showing negative returns.”
Yet, grain farms are worth more money today than they were a decade ago. Widmar’s blog, Agricultural Economic Insights, used U.S. Department of Agriculture data to report that, “The market value of crop production in 2012 increased 48% over 2007 levels,” thanks to increased demand from China, the ethanol mandate, and crop shortages due to the drought in 2012.
But while many farmers have more cash on hand, their profit margins have been shrinking since 2007 because production costs rose faster than earnings.
Widmar said the cost of inputs – such as land, seed, fertilizer, and chemicals - rose from 81 cents on the dollar in 2007 to 83 cents on the dollar in 2014.
It would break down like this:
- Let's say farmers made $10 selling their crop in 2007, but had to spend 81 cents of each dollar on land, seeds, fertilizer, and chemicals to plant next year’s crop, then they really only made 19 cents on the dollar. 19 cents X $10 = $1.90 net income.
- Versus in 2014, let's say farmers made $15 selling their crop, but had to spend 83 cents of each dollar on land, seeds, fertilizer and chemicals to plant next year’s crop, then they're only making 17 cents on the dollar. 17 cents X $15 = $2.55 net income.
This years’ downturn in corn and soybean prices means farmers will have to navigate even slimmer profit margins. Widmar said they will have to do more with less to squeeze through the next few years.
“Maybe they can hold back on some of their phosphorous and potassium fertilizers," Widmar said. "Maybe they can cut back their seeding rates on corn and soybeans. Maybe they can hold off on that extra fungicide application.”
He expects farm margins to improve in the long run.
Impact on Consumers
Widmar said that since not much corn from a corn farm ends up in your bowl of Corn Flakes, cereal prices won’t fall much. However, corn is a major ingredient in livestock feed, meaning we might see cheaper meat prices in 2015.
A more immediate impact will be on rural communities, which rely on farmers to pump cash into their local economies. With revenues and incomes shrinking, local businesses can expect farmers to spend less money around town.
“We’re going to see the family living expense -- the amount of money left over to support the family -- is going to get tighter," said Widmar. "So we’re going to see them cut back on that. And that goes anywhere from buying new car, to making improvements to their house, to going on vacation.”
Widmar, who grew up on a grain and livestock farm in southwest Kansas, said in his experience, farmers spend more time worrying when profits shrink.
“It’s tough. It's stressful," said Widmar." "I think it makes us better managers in the long run. And we spend a lot of time around the table talking about what we need to do and figuring out a way forward.”
He said it’s not fun, but added, “We definitely enjoy times like we’ve had the last several years – the good times - and so we take one with the other.”