2018 Ag Outlook: The Good, the Bad and the Ugly

by Darren R. Frye
Water Street Solutions

There is plenty to be optimistic about… but other trends are more challenging.

Over the past 12 years in farming, we’ve seen the best of times and the worst of times, thanks to unprecedented expansion of global grain and oilseed demand. This led to some of the best revenues on record, followed by a record four years of negative net farm incomes thanks to the exceptionally productive weather since 2014. Currently, how you look at the business of farming depends completely on which doors you open.

The Good…
There is plenty to be optimistic about amid the challenging economic conditions faced by Illinois farmers. Improvements in technology and production practices have helped farmers produce record-setting yields. Tighter margins have pushed farmers to increase their efficiency, yielding lower costs per bushel than just a few years ago. Fertilizer costs have continued to decline following their 2012 peak, resulting in lower input costs. Global economic activity and the lower-value US dollar have helped beef and pork exports reach record levels, expanding production here and increasing demand for feed grain.

The Bad…
Great weather and improved production technology have led to some of the largest carry-over inventories of the modern era for corn and soybeans, which have depressed prices for the fourth year in a row. International trade battles make U.S. agriculture an easy target for retaliation by other countries. Half of the soybeans raised in the U.S. are exported, with a majority ending up in China. The continued urbanization of the U.S. population is marginalizing the rural voice in Washington, as demonstrated by recent targets on the crop insurance program, which makes up eight percent of the farm bill (compared to 80 percent of the farm bill going toward national nutrition and food aid programs).

…And the Ugly
Farm real estate debt has more than doubled since the mid-1990s, fueled by low interest rates. However, with that era of cheap money moving behind us, farms are facing interest payment headwinds. The average Illinois farmer can expect an increase of more than $10,000 per year in interest costs for each percentage increase in interest rates. Farm lenders are closely scrutinizing customer balance sheets and business plans, with some economist estimates showing 30 percent of farm operations being “at risk” due to lack of equity and revenues. History would say we could be facing another two to four years of contracted markets, which will continue to force the least profitable operations out of the business.

In our work helping farmers understand their financial situation and build plans to manage uncertainty, we’ve seen that the most successful farms:

  • Remained conservative in their spending through the extremely profitable times of 2006 to 2012;
  • Acted quickly in 2014 to cut spending and become as efficient as possible;
  • Developed diverse sources of income (off-farm spouse’s job, additional business such as seed sales or excavation, etc.);
  • Put technology and production methods in place to maximize yield per acre; and
  • Proactively assessed risks and implemented effective market planning for crop and livestock sales.

2018 appears to be hopeful for many in agriculture, thanks to strong global demand and some potential weather uncertainty—yet farming has always been founded on the hope of what’s yet to come. iBi

Darren R. Frye is CEO of Water Street Solutions in Peoria.

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