Economist says capital purchases may switch from big equipment to smaller devices that increase efficiency
The possibility of years of losses or low margins could inspire farmers to invest even more money, some farm management experts say.
But that will be for fixing gaps left by the investing binge of the 2006-13 period rather than as a continuation of the binge.
“It’s been unsustainable,” agricultural economist Al Mussell of Agri-Food Economic Systems said about the rate of farmer investment in machinery, land and facilities that coincided with the fat profits of the 2006-13 crop bull market.
Farm management experts say farmers need to hunker down for a possible bad patch in profitability by making sure every element of their farms leads toward maximum efficient production.
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Farmers might have ended up with odds and sods of land, equipment and facilities and be earning less return on their assets than they could be getting. With low margins a present reality, improving returns from money already invested is crucial.
“Some farmers are already feeling the pinch. There’s restructuring going on already,” said farm management adviser Terry Betker of Backswath Management.
“If the margins stay narrow and the cost structure stays where it is, it’s going to continue to affect more and more farmers.”
Mussell said farmers need to step back from their farms to see if some of their recent investments have created production problems that are crippling efficiency.
“What is the bottleneck in your system?” said Mussell.
Fixing bottlenecks might require more investment in land, equipment or facilities to receive the full value of previous investments. Buying more could actually be key to lowering costs if the spending clears the bottleneck.
Farmers often respond to high profits by buying land and machinery so they can produce more. That happened in the 2006-13 boom, with farmland values skyrocketing as farmers competed for land and spent money on new farm equipment.
University of Illinois agricultural economist Gary Schnitkey released an analysis June 23 showing that northern Illinois farmers steadily increased their per acre machinery spending from an average of $42 per acre between 2002 and 2006 to an average of $154 in 2013. With low returns, that rate of spending can’t continue.
“While high levels of capital purchases were prudent in the recent past, capital purchases now need to be lowered on many farms due to lower incomes,” said Schnitkey.
To get back to $42 per acre would require a 72 percent reduction in spending.
“While a return to the economic difficulties of the 1980s is not likely, there is still a need to reduce capital purchases on many farms.”
Mussell said he thinks farmers will hold back on making major purchases of farm equipment but might switch their spending to cheaper devices such as the “gadgets” that can make the big pieces of equipment operate more efficiently, like auto-steer.
As well, farmers who have bought more equipment than they need for their present land base might buy more land to “drive down their unit costs,” said Mussell.
For Betker, surviving leaner times means farmers need to turn their attention back to cash flow management because it’s not safe to assume that lots of money will be flowing in through the year and savings will exist to cover bills.
“When they were making money and there was lots of cash around … it was just easy. You didn’t need to worry,” said Betker.
“The change of the focus going forward flips to finance and cash flow pretty quickly.”
It means farmers must ensure they are following a disciplined marketing approach, ensuring that sales match future obligations.
“You’re always trying to get as high a value of the commodity as you can, but when the margins are narrower and cash flow starts to be an issue, then the other element of marketing comes to the fore, and that’s timing.”
Betker said farmers must also reassess their risk management and safety net systems and programs. Many farmers complain programs have been weakened since the mid-2000s.
Those risk management tools weren’t so important when crops were earning lots of money, but in low margin times, farmers need to know what will happen if they need those tools.
Mussell said farmers need to undergo a profound psychological shift to be prepared for lean years.
Pushing hard on expansion stops being a dominant goal. Now the focus needs to be on making maximum return on what has already been invested, even if that requires further investments.
“When you’re in a bull market, the pressure on you as a manager is to capitalize on that revenue (potential). Your primary focus becomes capitalizing on this revenue opportunity,” said Mussell.
“In a leaner period, people turn back to focus on their cost side.”
