Farmers may dream of high crop prices lasting forever and fat profits swelling their bank accounts for decades.
But economists aren’t willing to sustain that hope. True to their reputations as practitioners of the “dismal science,” economists already see the down side of the commodity situation.
“It is obvious that a sharp spike in wheat prices will limit demand and spur a sharp increase in global wheat production,” said Michael Swanson, a Wells Fargo bank economist.
“Wheat prices can go much higher in the short term for the next three to six months, but in the intermediate and long term beyond that, prices will fall back to their cost of production.
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“This is not a forecast. It is an assertion of economic principles.”
If you are a hopeful farmer counting on crop profits to keep flowing at today’s rate for the rest of your career, beware: Swanson is no radical. He’s simply laying out a commonplace principle: price spikes don’t last forever.
The reasons are simple. As soon as an activity allows someone to make lots of money,
everyone wants to do it. That drives up the price of everything involved in doing the activity, as all the new players fight for the inputs. The increased activity eventually produces a surplus, which drives down the price.
So crop farmers can whine about high fuel, fertilizer, machinery and farmland prices as much as they like, but those higher costs are the almost inevitable spouse of high crop prices.
“It’s a consistent rule of economics,” said University of Manitoba agricultural economist Brian Oleson.
“If you have a hard resource with profits, the profits are going to go back into bidding up the price of those resources.”
Farmers might not want to hear this. After years of losing money, don’t farmers deserve to finally become long-term profitable?
Of course they do.
But it doesn’t matter what farmers deserve. Commodity price trends occur in an amoral economic world.
If farmers want to stay farming, they’d shouldn’t base their plans on this year’s level of profits becoming permanent, a “new normal.”
The last general commodity crop price surge lasted from the early 1970s to the mid-1980s, so farmers have a chance for a few years of profits.
If so, what can they do with those profits to make sure they’re not busted out of the industry the next time prices return, as Swanson so breezily predicts, to the cost of production?
To Oleson, who has pondered the brutal economics of farming for decades, farmers who succeed despite commodity price cycles tend to be rather dull.
“The guys who survived and survived well were the individuals who didn’t carry gigantic debt burdens and didn’t leverage themselves gigantically in those good times,” said Oleson.
“It’s these guys who just nibble away and keep growing around the edges.”
A farmer who manages to catch the first year of a multi-year commodity boom and then expands his operation before land prices skyrocket, has a great shot at making a huge amount of money. If he doesn’t have crop failures, of course.
But that’s like the stock investor who manages to catch the little company no one has ever heard of, like Microsoft in the early 1980s, and rides it to the moon.
A handful of people manage to do it, and millions spend their lives failing to do it.
For the average farmer, now is probably a time to enjoy profits and use them to pay the debts of the past. Reasonable expansion makes sense now, as always, to keep the farm as efficient as modern technology and methods allow.
And it may be a time to consider whether to diversify the farm to cushion the next cyclical downturn in crop prices, or concentrate even more on crop production to become super efficient.
But if you require today’s level of profits from now on just to survive, maybe it’s time to consider whether you want to wait around until Swanson’s prediction comes true.
If you’re about to ink the deal on that winter home in Arizona, maybe it’s time to think a little bit about that time in the late 1970s when Dad bought the Cadillac and the property in the Arizona desert.
A few years later a lot of those Cadillacs and sand ranches didn’t look so good.
