Lower margins | U.S. banker expects falling prices will put some less efficient farmers out of business
NEW ORLEANS, La. — A senior U.S. banker expects significant turnover in the farm community as plummeting grain prices squeeze out inefficient producers.
“I think there’s going to be a lot more stress sooner than people think because I think cash flows are going to be very, very poor when we start liquidating this crop,” said Michael Swanson, senior vice-president of Wells Fargo Bank.
Falling grain prices will lead to belt-tightening and force some growers to leave the industry, he told delegates attending the 2014 Oilseed & Grain Trade Summit.
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He believes the grain industry is entering a phase in which operators with aggressive expansion plans will fail, as will those who have been lax in monitoring the expense side of the ledger.
The top 20 percent of farmers in southern Minnesota produce a bushel of corn on rented land at a cost of $4.25 per bu. The bottom 20 percent spend $7.25 per bu. of production.
That $3 per bu. difference in the cost of production will determine who keeps farming and who doesn’t. The inefficient growers will get “knocked out,” said Swanson.
“We’re going to see a lot of turnover, and it’s because there is such an inequality of ability within the farming community,” he said.
The mentality of the farm community next year will switch to apprehension from euphoria as farmers are confronted by the reality of $3 corn and $9 soybeans.
“For the last several years it has been very easy to be in this space because rising grain prices typically made it easy to grow your top line,” said Swanson.
High prices hid the blemishes of farm operations where costs have spiraled out of control.
“Top lines are going to fall for many producers and many input suppliers, and suddenly they’re going to have to execute like any normal business does,” he said.
Swanson believes farm subsidies will make matters worse.
“(Policymakers) try to have a one-size-fits-all policy, which only exasperates the situation because good guys collect that much more money and go back after the bad operators yet again,” said Swanson.
Agribusinesses will also struggle in the low-price environment, but the impact will vary by industry.
Equipment dealers are in trouble because many growers overbought during the good times and will be able to coast for a while without replacing machinery.
However, the grain bin business is booming.
“With a 14.4 billion bu. (corn) crop and terrible basis, they can sell grain bins all day long,” said Swanson.
