When the margin disappears, how does farming change?

When are things normal? What is “normal,” in anything? What’s the real baseline of reality?

Those vague and nebulous musings aren’t actually as vacuous as they seem, but underlie so much of how we as humans operate our lives. We all try to set ourselves up to do well and work towards success in “normal” conditions, so it’s pretty important to figure out what that “normal” actually is.

This becomes an issue each time an era, epoch, period or time seems to end. We have to wonder if there’s a “new normal,” or if we have moved into an aberration from normal, or if we have in fact moved out of an aberrant period and have moved back into normal times.

This is happening right now across the farming country of Western Canada, as farmers grapple with not just one year of break-even (no real profits) returns, but the likelihood of another two or three years of the same. Futures prices aren’t reliable predictions of future prices, but they are the markets’ best guess at what prices should be with “normal” conditions based on where things are now. And what those futures prices show now is nothing moving much above where they are now.

So the reasonable expectation for farmers is three years of around break-even returns. That might be a shock to the system for farmers who had been getting used to fat profits since 2007, when the commodity bull market finally dragged crop prices higher. Thousands of farmers have made the best profits of their lives in the years since ’07, but that certainly hasn’t been true for the past year and won’t likely to true for at least two more years, barring a massive weather event that fundamentally changes the reasonable production estimation.

So how will that affect farmers? After a year of low returns, farmers are probably accepting that this is the new normal in farming, at least for the medium-term. They can’t bank on yearly profitability to pay for big investments, so what will they change now that we seem to be in a new era?

I’ve been bouncing that question off a few people and I’ve gotten similar responses:

1) Less new machinery purchases;

2) Less aggressive land-buying;

3) Every investment, including basic production input purchasing, to be re-examined for bottom-line impact.

I called farm management consultant Brent VanKoughnet to talk about this because I’ve seen him speak at numerous conferences and he’s about the most reasonable and wise farm management observer I know. As I expected, he provided me – instantly and with no need to pause and think about it – with exactly the kind of far-sighted and intelligent observations I was looking for. I won’t share them here because I have a story based on what he said to me in tomorrow’s (August 28) issue of The Western Producer, so you can see it there.

But I thought I’d share my guesses on how farmers will shift their management and practices to deal with a normal that now means break-even prices.

1) Putting off new machinery sales unless there’s a screaming need. The risk of buying multi-hundred thousand dollar machines didn’t seem too great when there was ample cash flow to cover the first few years of payments. Now, if that cash flow isn’t producing profits that exceed the increased machinery cost, farmers are likely to back away from making them. Farmers have lots of new machinery bought over the boom years, so lots can avoid or delay new purchases for years;

2) Backing away from aggressive land purchasing. Farmers will always try to match their land base the rest of their production systems, and try to establish a rational collection of acres to fit the local reality they farm in, but the kind of wild bidding wars that have been reported across the Prairies will undoubtedly subside. Land at any price now doesn’t seem like such a great idea, since if it isn’t going to produce an extra profitability, it isn’t a good investment just by itself.

3) Gadgets and gizmos lose their lustre. With big profits, it’s pretty easy to justify spending a few thousand dollars on something cool, fun and possibly good for the farm, such as a crop-scouting drone system. (If you haven’t been dreaming about this, I guarantee you a few of your neighbours have.)  If a few thousand dollars is more than a farmer’s expected net profitability that year, that expense might begin to feel reckless. And a farmer might wait to see his neighbours do it first, rather than race to be the first-adopter.

4)  Farmers will redevelop a sharp-edged “Show Me” attitude with all inputs and services. Extra inputs and treatments? Those probably seemed like good ideas when the chance for high profits was very good. If you spent a few bucks per acre and maybe got a few bucks more per acre from higher yields or better quality, it probably seemed like a good idea. When there’s no per acre net return, a per acre cost stops seeming like an automatic no-brainer. Farmers will be willing to do anything they truly believe will either boost or protect yields and production, but input and service providers are going to have to prove their worth to the farmer. If somebody wants to sell something to the farmer, they’re going to have to work at it.

5)  A move back to mixed farms. This is more of something I’d hope to see than something I think will actually happen. Farmers have become so specialized in their forms of production that the traditional mixed farm hardly exists any more. I run into very few farmers that have a few thousand acres of good cropland and 100 or 200 head of cattle. When I started working for this newspaper 20 years ago, every second farmer seemed to have 1,500 acres of crops and 40 cows. Now they’ve got 300 cows and no cropland (except for feed), or 3,500 acres-plus of cropland and no livestock. Because of bad times in livestock production (until the last year), there are far fewer livestock operations than 20 years ago. Bad times in crop farming until 2007 did the same thing to the number of grain growers. But survivors have seemed to focus and specialize on one thing, either crops or livestock, and double down on efficiency in whatever choice they took, rather than continuing to operate a mixed farm. Instead of embracing the inherent risk-spreading of a mixed farm, crop farmers have tended to view any losses in livestock production as a reason to get out it, while livestock producers have looked at crop farming risks or losses as reasons to get out of that sort of production. I hope that if we get stuck with a period of break even returns that crop farmers begin to see the value in having some cows on their marginal land (that should never have been put into crops anyway), or putting a hog-feeding barn on the farm.

6) A more conservative and cautious approach to farming, and a less optimistic, progressive and happy outlook on the future of farming. I dread this, but if we indeed end up with a few years of break-even returns, this unusual period of optimism and confidence that we’ve lived in since 2007 might end and be replaced by the more hunkered-down feeling I associated with farming before that time. For a joyful few years, agriculture has seemed to be the best part of the economy to be involved in. That’s been nice to be around. I hope the boom years have been enough to set up farmers to weather the next more challenging years in a way that doesn’t drag them back to the dreary and depressing mood that so often gripped agriculture before people started regularly making money.

I’m hoping that we haven’t moved into more than a temporary period of break-even returns. I’d like our readers to do as well as possible and it’s been nice covering good times in agriculture. So let’s hope this isn’t a new normal, but just a normal-for-now period that returns to a bit more of that post-2007 situation in a couple of years time. Unfortunately the only way we’ll know what the future’s going to bring is to live into it and see.

About the author

Ed White — Ed White has specialized in markets coverage since 2001 and has achieved the Derivatives Market Specialist (DMS) designation with the Canadian Securities Institute.

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  • Dayton

    Supply and demand? It’s an easy concept. Just drop your fertilizer for a year collectively and watch the prices soar. You may even see those inputs drop. No one will condone this especially a company or rag that profits from the advertising.