Managing expectations within the crop sector

{10e05a1d-3584-4b39-b4b4-0e98744c6cb8}_food_4_thought_90x90_blog_april2015Michael Swanson, Ph.D., Wells Fargo Chief Agricultural Economist

The question for the crop sector is how bad can it get before it gets better? 2014 results show a stunning spread between losses for Minnesota row crop operators. The results from operators who submitted their results to the University of Minnesota’s Farm Financial Center show that some farmers realized small profits on rented ground, but others lost hundreds of dollars per acre. Broken out by quantiles, the highest 20 percent managed an average profit of $73 per acre. However, the average crop insurance payment per acre was $184 for this group. And, without the crop insurance, this quantile would have lost $111 per acre. In contrast, the lowest 20 percent lost $309 per acre, and also received $107 of crop insurance per acre. Without crop insurance, this quantile would have lost $416 per acre.



With a much lower spring insurance price for both corn and soybeans, it is very unlikely that crop insurance will be as beneficial in 2015. The large drop in 2014 price helped trigger the generous payouts that offset what would have been much larger losses. In 2011 and 2012, crop insurance accounted for 2.4% of the production revenue per acre on Minnesota cash rent corn ground. In 2013 and 2014, crop insurance jumped to 18% of the value of crop production on cash rent corn ground. These massive payouts cost the USDA $8 billion in subsidies in 2013, with additional billions coming from the private sector. Even the government takes notice when a program grows from $2 billion in 2006 to $8 billion in 2013. In a budget environment ripe with competition for discretionary spending, this growth rate will begin to crowd out other spending at the United States Department of Agriculture (USDA), and make 2015 even tougher for the crop producer.

So, the answer to the question is that it can get much worse before it gets better for crop producers. The good news is that many producers built strong balance sheets in the previous period, and have already started making tough decisions on spending and cash rents. Unlike in the 1980s, lower leverage and interest rates will help many farmers avoid insolvency. Also, today, many farmers have much better accounting systems in place to analyze the situation. There will always be farmers that become exceptions to the rule, and won’t survive these types of negative cash flows, but their resources will flow to the stronger operators who will quickly make the right decisions. While it will be an unpleasant period following such excellent returns a couple of years ago, it will not be a return to the 1980s. And, the survivors will be in a great position for the inevitable upcycle.