Welcome back to normal.
It’s not nice, it’s not easy and it will destroy some, but unfortunately in farming, zero margins like those of today are the norm in a century and a half of North American crop production.
Over the long, long term, the cost of producing crops averages about what farmers as a group receive in sales prices. This is true of long-term returns in virtually every commodity business: the average price equals the average cost of production, providing zero long-term profits.
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How is this possible, some of you might say?
Surely profits are made in good times and losses are managed through bad patches until the next good period returns, so over the long run, there must be profitability.
However, hidden in the averages is a brutal truth: only better than average farmers survive the cycles and eke out long-term profits.
Today’s farms are built on a graveyard of failed or liquidated farms that couldn’t beat the averages.
Bulk commodity producers need lower-than-average per unit cost of production, overall good management and good luck to stay in the business and grow. Miss any of those factors and you’re out.
We might have entered a new part of the commodity cycle in the past year now that the sky-high profit potential of 2006-13 is behind us.
Futures prices looking forward three years say that the most reasonable guess for crop prices is about where they are today, which isn’t good.
Weather is always the random factor in farming, so prices could rise radically if something devastates a major world crop in the next couple of years.
However, prices could also fall if the world gets ideal weather in major production regions.
So how do farmers prepare for a period of intense margin pressure? What skills, structures and approaches do they need to be one of those who will survive and earn long-term profits?
That’s what I’ve recently been asking a number of the brighter minds I know in the prairie agriculture world and what I intend to keep exploring in stories in the coming months.
But for all of you, probably the most important first step is to accept that today’s situation isn’t out-of-the-norm and that the boom times were a rare but pleasant period that isn’t likely to return soon.
Sure, there are nine billion mouths to feed by 2050, as we’ve all been told a gazillion times, but that’s a long way away from really mattering.
Preparing for the long-term reality is something that everyone will need do or they will become one of the group of average or slightly below average farmers who won’t be around the next time profits begin to flow.
